© 2010 International Monetary Fund September 2010 IMF Country Report No. 10/284
August 2, 2010 August 27, 2010 January 29, 2001 June 9, 2010 2010 August 27, 2010 Indonesia: 2010 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Indonesia Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2010 Article IV consultation with Indonesia, the following documents have been released and are included in this package: The staff report for the 2010 Article IV consultation, prepared by a staff team of the IMF,
following discussions that ended on June 9, 2010, with the officials of Indonesia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on August 2, 2010. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
A staff statement.
A Public Information Notice (PIN).
A statement by the Executive Director for Indonesia.
The document listed below has been or will be separately released. Selected Issues Paper
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
Copies of this report are available to the public from
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International Monetary Fund Washington, D.C.
INTERNATIONAL MONETARY FUND
INDONESIA
Staff Report for the 2010 Article IV Consultation
Prepared by the Staff Representatives for the 2010 Consultation with Indonesia
Approved by Mahmood Pradhan and Aasim Husain
August 2, 2010
Mission. A staff team—T. Rumbaugh (head), L. Lipscomb, U. Ramakrishnan (all
APD), N. Budina (FAD), X. Li (MCM), and G. Adler (SPR)—visited Jakarta during
May31-June 9, 2010. Mr. Ferhani (MCM) joined the discussions on the Financial
Sector Assessment Program (FSAP), and Mr. Zavadjil (Senior Resident
Representative) also participated in the discussions. Ms. Vongpradhip (Executive
Director) and Mr. Kartikoyono (Advisor, OED) attended the meetings. The team met
with Finance Minister Agus Martowardojo, Bank Indonesia Governor Darmin
Nasution, other senior officials, and private sector representatives.
Past surveillance. In concluding the 2009 Article IV consultation (July 13, 2009), the
Fund praised the authorities’ policies to maintain stability and support growth in
response to the global crisis. Directors recommended enhancing budget flexibility and
improving public resource management. Directors also encouraged the authorities to
continue strengthening the monetary policy framework, including strong commitment
to the inflation target to help guide inflation expectations and enhance policy
credibility. Significant technical assistance is ongoing in the fiscal, financial, monetary,
and statistical spheres to help build a stronger institutional framework.
Analytical work. Background studies assess Indonesia’s export performance, inflation
volatility, priorities for strengthening the financial sector, and managing fiscal policy
under uncertainty.
Exchange rate regime. The exchange rate regime is classified as floating. Indonesia
has also accepted the obligations under Article VIII, Sections 2, 3, and 4, and maintains
an exchange system free of restrictions on the making of payments and transfers for
current international transactions.
Economic statistics are adequate for surveillance purposes, although they could be
improved in some areas (Annex IV).
2
Contents Page
Executive Summary .............................................................................................................. 3
I. Context ........................................................................................................................... 4
II. Economic Developments ................................................................................................ 4
III. Macroeconomic Outlook and Risks ................................................................................ 8
IV. Main Policy Discussions ................................................................................................ 9
A. Managing Volatile Capital Flows .......................................................................... 10
B. Monetary Policy: Managing Inflation Expectations ............................................... 12
C. FSAP and Financial Sector Stability ...................................................................... 13
D. Fiscal Policy: Supporting Sustained Growth .......................................................... 16
V. Staff Appraisal ............................................................................................................. 19
Boxes
1. Exchange Rate Assessment .......................................................................................... 11
2. Banking Sector Stress Test Results ............................................................................... 15
3. Administered Price Adjustments and Inflation Volatility .............................................. 18
Figures
1. Macroeconomic Developments and Outlook ................................................................ 21
2. Business Activity Indicators ......................................................................................... 22
3. Inflation and Monetary Developments .......................................................................... 23
4. Financial Market Performance ...................................................................................... 24
5. Banking Sector Indicators ............................................................................................. 25
6. Corporate Sector Indicators .......................................................................................... 26
Tables
1. Selected Economic Indicators, 2007–11 ....................................................................... 27
2. Balance of Payments, 2006–11 ..................................................................................... 28
3. Monetary Survey, 2005–09 ........................................................................................... 29
4. Summary of Central Government Operations, 2006–11 ................................................ 30
5. Selected Vulnerability Indicators, 2005–10................................................................... 31
6. Medium-Term Macroeconomic Framework, 2008–15 .................................................. 32
Appendices
1. Capital Inflows and Policy Response ............................................................................ 33
2. Public and External Debt Sustainability in the Baseline Scenario .................................. 36
3
EXECUTIVE SUMMARY
Current setting: Benefiting from strong initial conditions and robust domestic consumption,
the authorities successfully steered the economy out of the crisis with appropriate policy
responses, while even lowering public debt. Key challenges are to maintain the appropriate
policy mix in a volatile external environment while fostering sustained high growth.
Enhancing financial sector resilience and development based on the FSAP findings is also a
top priority.
Outlook and risks: Supported by a recovery in investment, growth is likely to be 6 percent
in 2010, rising to 7 percent in the medium term as infrastructure development takes hold.
Inflation is likely to be higher than in 2009, but still within Bank Indonesia’s (BI’s) target
range. Near-term risks would rise if there was a sustained increase in global risk aversion,
which could trigger capital outflows and dampen growth momentum. In the medium term,
stronger external demand could boost growth, but delays in implementing the planned
infrastructure program are a downside risk.
Managing capital flows: Attaining the appropriate policy mix to manage volatile capital
inflows is an ongoing challenge. The exchange rate is broadly in equilibrium and its
continued flexibility in both directions remains an important part of the policy toolkit. Rising
sterilization costs are a concern, underscoring the need to strengthen BI’s balance sheet and
operational toolkit. In this respect, the package of measures announced on June 16 could help
improve monetary operations and lower volatility of short-term capital flows.
Monetary policy: Bank Indonesia’s holding stance is appropriate for now, but signaling a
proactive stance is needed to anchor inflation expectations in the target range. Expectations
for 2011 are at the top end of the target range and several risk factors could push it higher.
Thus, unwinding monetary accommodation may need to start in the second half of 2010.
Administrative measures to fuel credit growth should be avoided since such actions could
conflict with banks’ prudential policies and risk management practices.
Financial sector stability: The joint IMF-World Bank FSAP confirms the sustained progress
in financial sector stability and identifies further reform priorities. Some banks are vulnerable
to credit and liquidity risks, which could be addressed by enhanced regulations. Stability
could be strengthened by addressing weaknesses in the legal framework, bolstering
coordination of macro and micro prudential supervision, and developing a deeper capital
market to deliver a more diverse funding base.
Fiscal policy: Better budget execution is critical for a more effective fiscal policy. Also,
phasing out energy subsidies, combined with expanding transfer programs and social services
for the poor, and increasing non-commodity based revenues are key to create added space for
infrastructure development.
4
I. CONTEXT
1. Indonesia’s growth in 2009 was the third highest among the G-20 group of
countries. Several factors contributed to this resilience: strong initial conditions (including
low debt levels), greater dependence on domestic demand, a diversified export base, and
appropriate policy responses.
2. Reflecting this economic strength, capital inflows have been surging, posing
policy challenges. Large portfolio inflows since the second half of 2009 have complicated
macroeconomic management and raised questions about the most suitable policy response.
Against this background, the Article IV Consultation focused on (i) achieving the appropriate
policy mix under a volatile external environment; (ii) enhancing systemic stability of the
financial sector based on key FSAP recommendations; and (iii) harnessing recent
performance to achieve sustained high growth.
II. ECONOMIC DEVELOPMENTS
3. Growth has been resilient and inflation subdued.
Real GDP growth in Q1 of 2010 was 5.7 percent (y/y), the fastest pace since Q3
of 2008, and comes at the back of 4½ percent growth in 2009. Domestic demand
continues to be a strong contributor, with a shift from consumption to investment
occurring in 2010, reflected by the rising imports of raw materials and capital goods,
as well as cement consumption (Figures 1 and 2). On the supply side, the service
sector—notably transport and communication—has anchored growth, with
manufacturing showing signs of recovery after slowing in 2009.
Inflation has remained relatively low in 2010, following a sharp deceleration in 2009.
With declining food and commodity prices and excess capacity in the economy,
average inflation slowed to 2.8 percent (y/y) in 2009, well below the 3½−5½ percent
target range (Figure 3). Average annual inflation through June 2010 has increased to
4 percent, mostly driven by higher food prices. Administered prices—which were
reduced in late 2008 and early 2009, partly reversing the increase that took effect in
June 2008—have increased broadly in line with headline inflation.
4. Financial markets have responded positively to the economic developments and
market sentiment remains broadly upbeat (Figure 4). Fitch upgraded Indonesia’s
sovereign rating in January this year to BB+ (one notch below investment grade), and S&P
and Moody’s upgraded their ratings to two notches below investment grade. Reflecting
global financial market conditions and consistent with other emerging markets, external
spreads declined. The government’s US$2 billion 10-year global bond issue in January was
5
heavily oversubscribed, ending
with a 6 percent yield, about
575 bps lower than a similar issue
in March 2009 and only 278 bps
higher than comparable
U.S. treasuries. Indonesia has so
far withstood well swings in
global risk aversion in May,
following Europe’s problems,
with only temporary and limited
volatility in domestic yields and external spreads.
5. Notwithstanding some turbulence in May from the European crisis, strong
capital inflows combined with small external current account surpluses have led to
rupiah appreciation and reserve accumulation.
Foreign capital has been pouring into Indonesia—net flows have been positive since
Q3 of 2009, and the pace accelerated in Q1 of 2010. Both push (global liquidity and
higher risk appetite) and pull (growth and yield differentials) factors have led to large
portfolio inflows, particularly into government bonds (SUNs) and short-term BI
certificates (SBIs), with foreign ownership at over 20 percent of the outstanding
stock. Meanwhile, the stock market reached an all time high in April this year. In
May, however, volatility increased following the European crisis, with US$5¾ billion
of capital outflows, about US$5 billion of which were SBIs which has historically
been the most volatile asset class in terms of foreign holdings. Strong inflows
resumed in June. Foreign direct investment jumped in Q1 of 2010 to
US$2½ billion—compared with only about US$5 billion in 2009—largely reflecting
investments in the power sector.
On the trade side, surpluses continued in Q1 of 2010, despite fast growing imports.
In 2009, weak exports were more than offset by the decline in imports—especially
investment-related imports—resulting in persistent current account surpluses.
Indonesia also benefited from higher commodity prices and China’s increased
demand for coal and copper.
Comparison of Sovereign Ratings
Moody's S&P Fitch Moody's S&P Fitch Definitions
Baa1 BBB+ BBB+ THA THA Investment grade
Baa2 BBB BBB THA
Baa3 BBB- BBB- IND IND IND
Ba1 BB+ BB+ IDN Noninvestment grade
Ba2 BB BB IDN IDN PHL Speculative
Ba3 BB- BB- PHL PHL
IND=India; IDN=Indonesia; PHL=Philippines; THA=Thailand
-8
-6
-4
-2
0
2
4
6
8
10
2007Q1
2007Q2
2007Q3
2007Q4
2008Q1
2008Q2
2008Q3
2008Q4
2009Q1
2009Q2
2009Q3
2009Q4
2010Q1
Balance of Payments(In billions of U.S. dollars)
Current account balance
Direct & other investment
Portfolio investment
Reserves and related items
0
5
10
15
20
25
0
5,000
10,000
15,000
20,000
25,000
2006Q4 2007Q2 2007Q4 2008Q2 2008Q4 2009Q2 2009Q4 2010Q2
SBI
SUN
Foreign ownership/outstanding (%, right scale)
Foreign Ownership(In millions of U.S. dollars)
6
Indonesia has relied more on exchange rate flexibility than many other emerging
markets. The Rp/US$ exchange rate appreciated nearly 35 percent from the trough in
March 2009 through April 2010, undoing the depreciation during the crisis.
International reserve accumulation has been relatively modest—about US$15 billion
in 2009 and US$12 billion through April 2010. Some of these gains were partially
reversed in May as the currency modestly depreciated due to the impact of the
European crisis. Reserves also dropped by about US$4 billion to US$74½ billion in
May, but recovered by nearly US$2 billion in June.
On June 16, BI introduced a package of measures to address money market volatility
and enhance its liquidity management toolkit. Specifically, to curtail short-term
volatility of capital flows, BI introduced a one-month holding period for SBIs,
whether purchased in the primary or secondary market by domestic or foreign
investors. Market reaction to the measures has been positive, with net foreign buying
of US$ 1 billion in both SUNs and SBIs since the announcement. In addition, to
further encourage financial deepening, BI also plans to introduce 9- and 12-month
tenor SBIs later this year in addition to the existing shorter tenors.
6. Monetary operations have been complicated by the large inflows, and BI has
responded by introducing measures to strengthen its liquidity management. Reserve
accumulation has added to the need for large draining operations, and BI has stepped up SBI
issuance since 2009. However, to deter banks from relying on SBI’s for short-term cash
management and onshore/offshore arbitrage activities, BI began in March 2010 to shift the
maturity structure of SBIs from one-month to 3- and 6-month tenors, and from weekly to
monthly auctions. Also, in the June 16 measures, BI widened the corridor between its
overnight deposit facility (FASBI) rate and the overnight BI repo rate by 100 bps to
5.5 percent to 7.5 percent, respectively. The wider corridor increases the borrowing cost from
BI and lowers returns on its deposits, encouraging banks to trade in the interbank market.
7. Additionally, Bank Indonesia has kept the policy rate unchanged since
September 2009. After easing the policy rate by 300 bps during the crisis, BI has left the rate
at an historic low of 6½ percent. Interbank and SBI rates declined in line with the policy rate,
but a similar reduction in deposit and lending rates has not occurred. To facilitate a reduction
-40
-30
-20
-10
0
10
20
02/0
7
05/0
7
08/0
7
11/0
7
02/0
8
05/0
8
08/0
8
11/0
8
02/0
9
05/0
9
08/0
9
11/0
9
02/1
0
05/1
0
Contribution from reserve accumulation
Contribution from change in exchange rate
Market pressure
Source: IMF, staff calculations.
1/ The exchange market pressure (EMP) index is defined as: change in nominal exchange rate vis-à-vis U.S. dollar plus ratio of change in international reserves to monetary base.
Indonesia: Exchange Market Pressure Index 1/
-30
-20
-10
0
10
20
01/0
7
03/0
7
05/0
7
07/0
7
09/0
7
11/0
7
01/0
8
03/0
8
05/0
8
07/0
8
09/0
8
11/0
8
01/0
9
03/0
9
05/0
9
07/0
9
09/0
9
11/0
9
01/1
0
Contribution from reserve accumulation
Contribution from change in exchange rate
Market pressure
Source: IMF, staff calculations.
Emerging Asia (excluding China): Exchange Market Pressure Index
7
in deposit rates, with the expectation that such a move will also lower lending rates, BI
guided 14 banks in August 2009 to gradually reduce their deposit rates to no more than
50 bps above the policy rate by December 2009. Banks complied with the deposit rate
reduction, but lending rates have remained mostly sticky downward, resulting in wider
spreads between deposit and lending rates.1 Still, credit growth in 2009 was 10 percent—
markedly lower than in previous years, but consistent with the economic conditions in a
crisis year as demand for working capital and investment funding had declined—but is
gaining strong momentum in 2010 (annual growth of 18½ percent in June).2
8. Despite expanded fiscal space for countercyclical policy, support was modest by
international standards. Public finance improvements prior to 2009—average primary
surpluses of 2 percent of GDP during 2005−08—created ample room for countercyclical
fiscal policy to respond to the global shock. However, the fiscal stimulus— mostly corporate
and income tax cuts planned before the crisis—was only 1.1 percent of GDP or about half the
G-20 average, which was appropriate given Indonesia’s resilience to the shock. As a result,
there was a primary surplus of 0.1 percent of GDP in 2009, and public debt declined to about
29 percent of GDP—the only country in the G-20 with a declining debt ratio in 2009.
9. Financial soundness indicators remain strong. Banks were generally resilient to
the crisis as evidenced by their capital adequacy ratio (CAR) of 17½ percent at end-2009,
above the regulatory minimum of 8 percent and BI’s informal target of 12 percent
(Figure 5).3 Gross nonperforming loans (NPLs) increased by 14 percent in 2009, but the NPL
1 Anecdotal evidence suggests that banks, particularly those with lower liquidity, are giving vouchers to attract
more deposits, raising their effective deposit rate to more than 7 percent.
2 Compared with the period 2004−08, when loan growth was accelerating rapidly, total credit growth in 2009
was relatively weaker than nominal GDP. However, such an outcome is consistent with the sharp increase in
credit risk aversion and liquidity shortage in 2009.
3 There were two bank failures during the crisis: Bank Century was taken over by the deposit insurance agency
in November 2008 and Bank IFI was closed and liquidated in March 2009.
0.0
0.5
1.0
1.5
2.0
2.5
3.0
AdvanceAsia
NIEs IDN PHL THA MYS SGP G-20
Comparison of 2009 Fiscal Stimulus
Asia, average
-10
-5
0
5
10
15
20
25
IDN
AR
G
RU
S
ME
X
CH
N
SA
U
KO
R
PO
L
IND
CZ
E
ZA
F
AU
S
BR
A
HU
N
TU
R
DE
U
ITA
FR
A
US
A
CA
N
UK
R
ES
P
GB
R
Change in Public Debt-to-GDP Ratio, 2008/09
8
ratio was broadly unchanged at 3.2 percent of total loans, and loan loss coverage increased.
Despite the difficult operating environment, profitability remained high with net interest
income driven by higher interest rate spreads and loan growth, and banking sector liquidity
conditions improved during the year.
10. Overall, the corporate sector also weathered the crisis well. Balance sheets were
relatively more liquid compared with other
countries in the region and were able to
withstand reduced access to foreign
funding. There has been a general shift in
bank lending from corporate loans to retail
and SME lending over the last few years,
with a modest comeback in corporate
lending during 2007−08 to support
infrastructure spending (Figure 6). After a
decline in bond issuance during the crisis,
large corporations have returned to local
debt markets since mid-2009, though issuance remains sporadic.
III. MACROECONOMIC OUTLOOK AND RISKS
11. Growth is expected to accelerate with rising contributions from investment. Real
GDP is projected to grow by
6 percent in 2010, as private
investment recovers. Robust export
and import growth are also likely,
albeit from a low base. Medium-
term growth is projected to be about
7 percent as investment grows in
line with the planned infrastructure
development.4 Inflation is expected
to be higher in 2010, but within
BI’s target range of 4−6 percent.
12. An external current account surplus is expected in 2010, but smaller than
in 2009. Exports are expected to recover from the sharp decline in 2009 as growth in trading
partners recovers from the low base. Moreover, higher prices and demand for commodities—
primarily from China—are also expected to contribute to export growth.5 Growth in imports,
4 While a robust measure of potential growth is not available given large structural shifts in the economy, staff
estimates that the output gap is likely to close in the second half of 2011.
5 Chapter I of the selected issues examines the evolution of Indonesia’s exports in recent years.
2008 2009 2010 2011 2012 2013 2014 2015
Real GDP growth 6.1 4.5 6.0 6.2 6.5 6.7 7.0 7.0
Domestic demand 7.6 5.3 5.8 6.3 6.6 6.7 7.0 7.2
Net exports 1/ 0.7 1.2 0.8 0.6 0.6 0.7 0.7 0.5
CPI inflation (end period) 11.1 2.8 5.7 5.6 4.9 4.3 4.0 3.6
Saving and investment
Gross investment 27.7 31.1 32.0 32.8 33.9 35.5 37.0 38.6
Gross national saving 27.7 33.0 32.9 32.8 33.4 34.6 36.0 37.5
Current account balance 0.0 2.0 0.8 0.0 -0.6 -0.9 -1.0 -1.1
Central government balance -0.1 -1.6 -1.9 -1.7 -1.6 -1.6 -1.6 -1.5
Central government debt 33.2 28.6 27.0 26.3 25.5 24.7 24.0 23.3
1/ Contribution to GDP growth (percentage points).
Indonesia: Medium-Term Macroeconomic Framework, 2008–15
(Percentage change)
(In percent of GDP)
0
20
40
60
80
100
120
140
China Indonesia Thailand Malaysia EmergingAsia
India Korea
Corporate Leverage: Debt to Equity, 2009 1/(In percent)
1/ End-2008 data for Indonesia.
9
mainly capital goods and raw materials, is expected to be driven by accelerated investment.
In line with the economic cycle, the current account is projected to move to a slight deficit
over the medium term.
13. Risks to the outlook are broadly balanced. Direct spillovers from the European
crisis are likely to be limited given low dependence of Indonesian banks on foreign funding
and modest trade exposure to the region. However, an increase in global risk aversion creates
near-term risks because it could trigger capital outflows and squeeze liquidity, dampening
growth momentum. In the medium term, the possibility of sustained and stronger external
recovery combined with larger foreign direct investment, as the investment climate improves,
could further boost growth potential. Downside risks to growth could stem from weak
implementation of the government’s infrastructure development program. Inflationary risks
in 2010/11 arise from rising commodity prices and supply-side constraints (see also ¶19).
14. Authorities’ views: There was broad agreement with the growth outlook, and the
authorities remain cautious about global economic conditions and spillovers to Indonesia.
The government considers medium-term growth of about 7¾ percent as feasible with the
implementation of its infrastructure program that will help expand capacity and boost
productivity. In this regard, the authorities also noted that the recent signing of a decree
easing foreign investment restrictions in over 40 industries, including healthcare and
agriculture, is likely to increase foreign investment.
IV. MAIN POLICY DISCUSSIONS
A. Managing Volatile Capital Flows
15. Recent growth performance, combined with recent and prospective ratings
upgrades, have made Indonesia an attractive investment destination, albeit posing
policy challenges. The authorities’ policy response has focused on exchange rate flexibility,
supplemented by modest reserve accumulation aimed at reducing the short-term volatility of
the exchange rate. More recently, a one-month holding period on all SBI holdings has been
introduced (see ¶5). Despite the lack of evidence of emerging asset bubbles, continued large
inflows are worrisome because additional upward pressure on the rupiah could weaken
competitiveness, and further increase sterilization costs. In addition, given the short˗term
nature of the inflows, there are also concerns about the risk of a sudden reversal arising from
renewed global risk aversion.
16. Staff supported the authorities’ policy response to manage the inflows, including
measures to deepen the capital market, and discussed the pros and cons of imposing
administrative measures to manage volatility.
Exchange rate flexibility has served Indonesia well in absorbing external shocks
during the 2008/09 global financial crisis, and should remain a significant part of the
policy response to volatile capital flows. Staff’s assessment is that the current
10
exchange rate level is broadly in equilibrium (Box 1), allowing room for some further
appreciation in response to continued capital inflows. While sustained appreciation
could affect competitiveness, implementing measures to remove supply constraints,
including developing infrastructure and improving the investment climate, would help
ease the stress. Moreover, anecdotal evidence suggests that some industries
(e.g., footwear and garments) are relocating to Indonesia from other Asian countries
due to its relatively lower labor costs.
Further modest strengthening of reserve buffers may be justified given Indonesia’s
sensitivity to global risk aversion, evidenced even as recently as 2008/09, despite
some standard metrics indicating adequacy of the current reserve level (Appendix I).
Mounting sterilization costs, however, are a concern. This situation highlights the
need to address the long-standing issue of nonmarketable government securities on
the central bank’s balance sheet.6
An agreement with the government to make this
debt marketable would expand BI’s operational toolkit for liquidity management.
Securing a firmer financial footing for BI would better align its incentive structure
with its mandate.
The one-month holding period on domestic and foreign investors could be effective in
deterring short-term inflows since offshore investors cannot use onshore banks to
invest in SBIs to circumvent the regulation. If the measure works, less BI intervention
may be needed to stem rupiah appreciation, lowering its sterilization costs. But staff
also cautioned that rolling over the existing stock of SBIs could become more costly
as SBI yields rise to compensate for lower liquidity, potentially increasing overall
sterilization costs. In the short-term, the measures may also complicate cash
management for banks and longer-term investors, given relatively weak repo and
interbank market trading.
17. Authorities’ views: The authorities agreed with staff analysis of policy options,
including addressing supply constraints to relieve potential competitiveness pressures
triggered by rupiah appreciation. They also agreed that making the nonmarketable
government securities marketable could improve monetary management, and discussions
between the government and BI are underway. On the one-month holding period requirement
for SBIs, the authorities noted that it was meant to curb volatility and applies equally to
domestic and foreign investors, and, therefore, should not adversely affect foreign investor
sentiment.
6 The notional amount of nonmarketable and noninterest earning government securities on BI’s balance sheet is
roughly equal to the outstanding amount of SBI’s issued to drain liquidity. If a portion of these securities were
replaced by interest bearing marketable instruments, BI could sell them to replace maturing SBI’s to drain
liquidity, without incurring losses.
11
Box 1. Indonesia: Exchange Rate Assessment
Indonesia’s real effective exchange rate (REER) fluctuated significantly during the 2008 crisis, due to
sharp moves in the nominal exchange rate. It fell
nearly 20 percent from its peak in August 2008,
before turning around in February 2009 to
surpass pre-crisis levels by April 2010.
Strong real appreciation has been accompanied
by a marked pick up in imports after the crisis—
reflecting robust domestic demand—but exports
have also performed remarkably, mostly
reflecting booming commodity prices and
volumes. Strong export performance has allowed
the trade balance and the current account (CA) to
remain positive, although there are some signs of
modest weakening. There is also evidence of some key manufacturing sectors (e.g., textiles, electric
machinery, furniture, paper) being sluggish, suggesting that competitiveness may have eroded somewhat
in recent years, although other manufacturing sectors are growing robustly (e.g., road vehicles, industrial
machinery) (see Chapter I of the selected issues).
Different CGER methodologies deliver somewhat different results, but all of them suggest the exchange
rate is close to the equilibrium value:
The external stability (ES) approach points to a 9 percent undervaluation, with a gap of 1.3 percentage
points of GDP between the NFA-stabilizing CA (−2.4) and the underlying CA (−1.1). The result
mainly reflects a baseline projection with a yet-to-materialize pick up in real GDP growth (averaging
7 percent over the medium term, against an average of 5.5 percent for the period 2003−07) which
would allow a higher-than projected current account deficit while maintaining the NFA position stable
at the estimated end-2009 level (−34.5).
The macroeconomic balance (MB) approach
points to an overvaluation of 5 percent,
resulting from a gap of 0.9 percentage points
of GDP between the underlying CA (−1.1)
and the CA norm (−0.2).
Finally, the equilibrium real exchange rate
(ERER) approach suggests that, under the
projected path, the exchange rate would
converge to its equilibrium value (zero
misalignment) in 2010, after several years of
undervaluation. This result mainly reflects significant real appreciation in recent years, while the
equilibrium REER has remained broadly constant, as improving terms-of-trade have been offset by
reduced government spending (relative to trading partners).
Overall, close-to-equilibrium CGER estimates (from both sides) and a positive but weakening trade
balance and CA, suggest that there is no clear evidence of misalignment at this point.
-23.4
-33.4
-12.7
-8.7
-16.7-19.9
-7.9-6.1
-8.6
-14.2
2.71.0 0.7 0.5 0.4
-60
-50
-40
-30
-20
-10
0
10
20
60
65
70
75
80
85
90
95
100
105
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
Misalignment (right scale, percent)
Actual (left scale, level)
Equilibrium (left scale, level)
Equilibrium Real Exchange Rate Approach
0
50
100
150
200
250
300
350
400
450
40
60
80
100
120
140
160
180
Jan-9
5
Sep-9
5
May-9
6
Jan-9
7
Sep-9
7
May-9
8
Jan-9
9
Sep-9
9
May-0
0
Jan-0
1
Sep-0
1
May-0
2
Jan-0
3
Sep-0
3
May-0
4
Jan-0
5
Sep-0
5
May-0
6
Jan-0
7
Sep-0
7
May-0
8
Jan-0
9
Sep-0
9
REER (left scale)
NEER (right scale)
Rupiah/US$ (right scale)
Key Exchange Rates, 1995–2010(Index, 2000=100)
12
B. Monetary Policy: Managing Inflation Expectations
18. BI has signaled its intent to maintain its current stance until inflation climbs
outside the 4−6 percent target range. While some tightening was implemented through the
increase in reserve requirements announced last year,7 the immediate need to raise interest
rates is mitigated by the rupiah appreciation and the delay in administered price increases.8
19. BI’s holding stance is appropriate for now, but signaling a proactive stance is
necessary to anchor inflation expectations within the target range. BI’s current stance is
justified as inflation expectations for 2010 are well within the 4−6 percent target range, and
given the risk that hiking rates now could attract even more volatile portfolio capital.
Looking ahead, however, inflation
expectations for 2011 are at the top end of
the range (5.9 percent, June Consensus
Survey forecasts). Various risk factors
could push expectations higher, including
a narrowing output gap, recovering credit
growth, excess liquidity, commodity price
fluctuations, and potential administered
price hikes. Given limited scope for a
countercyclical fiscal policy response (see
¶27), the near-term burden falls on
monetary policy to respond to economic and financial developments. Based on the current
inflation and growth projections, an estimated Taylor rule indicates that unwinding may need
to start in the second half of 2010, broadly consistent with market expectations. Also,
continued efforts by BI to communicate its strategy to anchor inflation expectations will help
signal commitment to lower the level and volatility of inflation in line with trading partners,
helping lower Indonesia’s term premium and boosting medium-term growth potential.9
20. Staff supported recent measures to develop the money market as they broadly
complement each other, encouraging development of the interbank market and
enhancing BI’s liquidity management. A lower FASBI rate gives banks an incentive to
trade in the interbank market, rather than park cash in BI deposits when short-term
investments in SBIs are no longer available for cash management. However, staff also
7 BI increased banks’ minimum reserve requirement (RR) from 5 percent to 7.5 percent in October 2009. BI had
reduced RR from 9 percent to 5 percent during the liquidity squeeze at the peak of the 2008 crisis, at which time
BI also announced that the 2.5 percent secondary reserve requirement would take effect a year later.
8 The 10 percent electricity tariff hike from July is likely to have only a relatively small inflationary impact.
9 Chapter II of the selected issues shows that Indonesia’s borrowing costs have been higher than peer countries
over the last few years due to elevated local currency term premia.
0
5
10
15
20
25
30
0
5
10
15
20
25
30
20
05
:1
20
05
:3
20
06
:1
20
06
:3
20
07
:1
20
07
:3
20
08
:1
20
08
:3
20
09
:1
20
09
:3
20
10
:1
20
10
:3
20
11
:1
20
11
:3
BI rate
Inflation
Taylor rule rate
Indonesia: Monetary Policy Stance
13
cautioned that managing market interest rates close to the policy rate would be needed to
maintain policy credibility. Regarding the planned issuance of the 12˗month SBI from
September, close coordination with the government—which also issues one-year treasuries—
will be necessary to manage the yield curve.
21. Staff advised against introducing administrative measures to boost credit
growth. Given BI’s concerns that the current credit recovery is weaker than would be
expected with the prevailing economic and liquidity conditions, it is considering changing
the regulation on the reserve requirement by linking it to each banks’ loan-to-deposit ratio
(LDR).10 Under the measure, any deviation in banks’ LDR from a certain threshold would
require banks to hold additional reserves at BI. Staff believes that credit growth is gaining
momentum in line with the economic recovery cycle and the sharp rise in credit approvals
foreshadows even stronger credit growth. Most importantly, BI’s planned action could
conflict with sound prudential policies and banks’ own credit risk management measures.
22. Authorities’ views: BI observed that with inflation expected below target this year,
the current policy stance was likely to be maintained unless global developments warrant
action or if there was a major administered price adjustment. On linking reserve requirements
to the LDR, BI disagreed with staff that credit momentum is picking up sharply. They instead
attributed the recent increase in credit growth to low base effects, and feared that credit
growth would slow again as the year progresses. In their view, creating symmetric incentives
for achieving an appropriate LDR will facilitate better financial intermediation.
C. FSAP and Financial Sector Stability
23. Indonesia has made great strides over the last decade to improve financial sector
stability. Progress has been made in bank regulation and supervision, including stricter loan
10
A similar measure was in place for some years, including prior to the 2008 crisis, at which time credit grew
rapidly. However, at that time, banks had to meet the higher RR only if their LDR fell below the threshold.
30
40
50
60
70
80
90
100
Jan-0
3
May-0
3
Sep-0
3
Jan-0
4
May-0
4
Sep-0
4
Jan-0
5
May-0
5
Sep-0
5
Jan-0
6
May-0
6
Sep-0
6
Jan-0
7
May-0
7
Sep-0
7
Jan-0
8
May-0
8
Sep-0
8
Jan-0
9
May-0
9
Sep-0
9
Jan-1
0
May-1
0
Loan-to-Deposit Ratio for Indonesian Banks
State banks
Commercial banks
Foreign banks
Regional government banks
0
10
20
30
40
50
0
50
100
150
200
250
300
350
400
Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10
Credit approval (in trillions of rupiah)
Credit growth (percent, y/y, right scale)
Credit Indicators
14
classification and provisioning, tightened related-party lending limits, higher capital
adequacy requirement, and tightened foreign exchange open position limits. BI has also
increased transparency and corporate governance, enhanced on- and off-site supervision, and
instituted fit-and-proper tests for controlling shareholders and bank management. More
recently, BI introduced individual bank risk assessments, enhanced consolidated supervision,
and is moving progressively toward Basel II.
24. The joint IMF-World Bank FSAP finds overall resilience of the banking sector.
The banking system has a large capital buffer and ample liquidity. Banks were profitable
in 2009 despite the economic slowdown, and are expected to improve further as growth picks
up. Stress testing under the FSAP finds that only under extreme shocks some banks become
vulnerable to liquidity shocks and a few large banks susceptible to concentration risk.
Exchange rate and contagion risks were not major concerns (Box 2).
25. The FSAP also identifies further reform areas to enhance financial sector
resilience. The FSAP’s key reform priorities—the legal and governance framework,
coordination of macro-micro prudential supervision and crisis management, securing BI’s
financial independence, and developing capital markets—are further enumerated below.11
A sound legal framework is vital for financial stability and development of the
financial sector. Addressing weaknesses in the legal and institutional framework,
governance, and protection for supervisors is needed to improve financial stability.
To provide a legal foundation for crisis management, it is crucial to adopt the revised
Financial System Safety Net Law, which should also help clarify the responsibilities
of the various financial safety net participants (i.e., BI, Financial Services Authority
(OJK), LPS, and Ministry of Finance). In addition, introducing a legally mandated,
prompt corrective action regime that makes required actions explicit (e.g., a time limit for
problem banks to remain under intensive supervision) would help speedy resolution of
problem banks. Going forward, strengthened enforcement of creditors’ rights will be
important to reduce the cost of lending and promote financial intermediation.
While revising the financial supervisory framework, it is important to ensure the
coordination of macro-micro prudential supervision. The new framework should
include a financial stability mandate, which BI is in a position to assume given its
expertise in macro oversight. For this, BI must be able to continuously monitor
systemically important banks and financial conglomerates. BI also needs full and
timely access to the latest individual bank supervisory information, especially to
perform its lender of last resort function. If bank supervision is transferred out of BI,
it needs to be managed carefully to avoid losing already established capacity.
11
More details on FSAP˗related issues are in the companion paper Financial System Stability Assessment.
15
Box 2. Indonesia: Banking Sector Stress Test Results
The banking sector was stress tested during the FSAP to assess the impact of a range of tail risks. Both scenario
and sensitivity analyses were applied. For the scenario analysis, the impact of a severe recession on the banking
system—whereby the economy contracts by 5 percent, in sharp contrast to an average actual growth rate of about
5 percent during 2001−09—was assessed based on a macro credit risk model. The sensitivity analysis comprised
market risk (e.g., interest rate, exchange rate, liquidity and interbank contagion risks) and concentration risk
(collective default of the 10 largest system-wide borrowers) shocks and also a multifactor shock (exchange and
interest rates).1/
Both top down (TD) and bottom up approaches (BU) were used. In the TD, the balance sheet for each
of the 121 banks was stress tested using common assumptions. In the BU, the 12 largest banks conducted stress tests.
The stress tests highlight the relative import of potential vulnerabilities to guide efforts to further
strengthening financial stability, while the probability of the outcomes are very small by design. In sum, the
sensitivity analysis showed that Indonesian banks are relatively resilient to market shocks. This is largely due to
banks’ small proprietary trading positions; tight management of the net open foreign currency positions (NOP); the
use of plain vanilla interest rate and foreign currency hedging instruments; and the regulatory restrictions on banks’
risk exposure to equities and structured products. The most vulnerability is to credit risk, followed by interest rate
risk. Some banks are vulnerable to liquidity shocks while exchange rate and contagion risks are negligible.
Specifically:
Under the extreme macroeconomic shock to analyze credit risk, a third of the banks become undercapitalized with
capital adequacy ratios (CARs) falling below the 8 percent regulatory minimum in the TD analysis, and three out
of eight banks participating in the BU scenario analysis become undercapitalized when banks take into account
their profit projections and using their own models to map macro shocks to credit performance. Non-performing
loans would increase significantly. State-owned banks are most vulnerable, while small banks, with significant
capital and liquidity buffers, weather the stress scenarios better than large and mid-sized banks.
Sensitivity analysis to market shocks indicated that banks are most vulnerable to interest rate shocks. A
10 percentage point hike in interest rates would cause a 2½−3 percentage point drop in system-wide CAR, with
close to one out of five banks becoming undercapitalized. Domestic private banks are the most vulnerable with
one quarter reporting CAR below 8 percent, followed by state˗owned banks. This vulnerability is ascribed to
banks’ short-term funding, with over 90 percent of deposits having maturities of less than one month and at call.
Some second-tier large and medium-sized banks are vulnerable to liquidity shocks. About one out of five of these
banks would run out of liquidity at the end of a five-day deposit run. Most of the banks that become illiquid have
high loan to deposit ratios, averaging 89 percent in contrast to 74 percent for the group that stays liquid.
A few large banks are vulnerable to concentration risks. These banks have large exposures to state˗owned
enterprises, which enjoy a single borrower-lending limit of 30 percent. If their ten largest borrowers default, five
large banks would become undercapitalized, and one would become insolvent.
Banks exposure to exchange rate and contagion risks are negligible. Given tight rules on managing banks’ NOP, a
50 percent depreciation would reduce the system-wide CAR by only 0.1 percentage point. Banks’ interbank
exposures are limited; only four small banks are at risk of becoming undercapitalized if one of their large
borrowers fails.
The stress tests underscore the importance of prudent banking regulations and supervision. Given susceptibility
to credit risk, applying international best practices in asset classification and provisioning will help ensure the quality
of banks’ capital. Banks’ vulnerability to interest rate risks highlights the importance of introducing regulations and
enhancing supervision of interest rate risk. Above all, it is important to enact the financial safety net law to deal with
any unexpected shocks timely and effectively.
__________________________________
1/ Shocks to interest and exchange rate were set at two standard deviations from the mean during 2001−2009. A
liquidity shock is simulated by a daily deposit withdrawal calibrated to the pattern of the short-lived liquidity stress
during the fall of 2008 and a shock to haircut of collaterals used for borrowing.
16
Capital market development is needed to diversify funding sources. This initiative
would be supported by strengthening legal and accounting standards (including
augmenting the Capital Markets Law), encouraging state-owned enterprises to list on
the domestic exchange, and expanding the institutional investor base by supporting
development of the pension fund industry.
Strengthening BI’s balance sheet would increase financial independence and enhance
monetary management. (As described in ¶16, bullet 2).
26. Authorities’ views: The authorities were in broad agreement with the main
conclusions of the FSAP. They are in the process of preparing an action plan to address the
key priorities, and requested IMF technical assistance in a number of areas to help build
capacity and guide the necessary reforms. They noted that three pieces of legislation are
under consideration to reform the legal and governance framework of the financial system,
i.e., creation of the OJK, the Financial Safety Net law, and revising the BI Act in the area of
appointment of BI’s top management. They recognized the importance of coordination
between micro and macro prudential supervision and noted that the FSAP’s recommendation
will be considered in the current policy debate on the OJK. The government and BI both
recognize the need for capital market development, and they welcomed further guidance on
setting priorities.
D. Fiscal Policy: Supporting Sustained Growth
27. Indonesia’s 2010 budget is modestly expansionary unlike the rest of Asia, but
remains consistent with macroeconomic
stability. The 2010 budget envisages a
deficit expansion to 2.1 percent of GDP,
with the bulk of the expansion stemming
from implementation of the second round
of corporate tax cuts planned before the
crisis (Rp 30 trillion or 0.5 percent of
GDP).12 Staff estimates that the deficit
could be slightly lower (1.9 percent of
GDP) largely based on the historical
pattern of under spending, While a
stronger countercyclical fiscal policy stance would have been desirable, the room for such a
stance is constrained by the permanent tax measures implemented, structural rigidities in
12
Tax amendments passed in 2008 have been implemented in stages since January 2009 and as part of the
stimulus packages. In 2009, the corporate income tax (CIT) rate was cut from 30 percent to 28 percent with a
5 percent discount for listed companies; personal income tax was reduced from 35 percent to 30 percent. In
2010, the CIT rate was reduced further to 25 percent with the 5 percent discount for listed companies.
-0.6
-0.4
-0.2
0.0
0.2
0.4
0.6
0.8
1.0
1.2
Indonesia
Mala
ysia
Phili
ppin
es
Sin
gapore
Thaila
nd
AS
EA
N-5
Industr
ial
Asia
Em
erg
ing
and N
IEs
Asia
Automatic stabilizers
Fiscal impulse
Change in 2010 Fiscal Stance(In percent of GDP)
17
spending, and a higher subsidy bill due to deferment of domestic fuel price increases. Even
as estimated, however, the net fiscal impulse amounts to only 0.3 percent of GDP, posing no
threat to debt sustainability as public debt is likely to remain below 30 percent of GDP and
risks are manageable under all adverse scenarios.13
Financing risks in 2010 are very low,
given that two-thirds of the financing need has already been met.
28. Further fiscal consolidation is expected from 2011, but will need to be
supplemented by fiscal reforms to support sustained high growth. Fiscal consolidation is
planned from 2011, with a fiscal target of 1.7 percent of GDP, implying a stimulus
withdrawal of 0.2 percent of GDP relative to 2010. While supporting the strategy, staff also
stressed that achieving the medium-term growth targets would require redirection of
spending priorities, better budget execution, and improving tax revenue ratios. Specifically:
Improving both the quality and quantity of Indonesia’s publicly provided
infrastructure services, which currently has a relatively low international ranking,
requires creating fiscal space for more capital spending, especially for the power
sector and inter-island connectivity.
In its absence, supply-side
bottlenecks would constrain
achieving sustained high growth.
Phasing out energy subsidies,
combined with expanding transfer
programs and social services for the
poor, will help create additional
fiscal space for public investment
with little impact on fiscal
sustainability. In this regard, the
increase in the electricity tariff by
10 percent from July is a step in the right direction, despite its small fiscal impact
(0.1 percent of GDP compared with the budgeted subsidy of 3.2 percent of GDP).
However, postponement of the increase in administered fuel prices in 2010 is a
setback to subsidy reforms. With rising fuel consumption, volatile oil prices, and oil
production uncertainties, delaying subsidy reforms could increase fiscal
vulnerabilities over the medium term. Moreover, past ad hoc administered price
adjustments have spurred substantial inflation volatility, complicating monetary
policy implementation (Box 3).
13
Chapter IV of the selected issues examines public debt sustainability under various economic shocks (the
exchange rate, borrowing costs, real GDP growth, and oil/gas volatility).
0 10 20 30 40 50 60
SGP
HKG
AUS
JPN
CHN
NZL
KOR
TWN
THA
IND
IDN
PHL
2009 2005
Source: IMD, World Competitiveness Yearbook1995–2009.
1/ Total number of countries: 51 in 2005, 57 in 2009.
Basic Infrastructure Ranking 1/
18
Box 3. Indonesia: Administered Price Adjustments and Inflation Volatility
The inflation level and its volatility have been
higher in Indonesia than some of its peer countries.
Indonesia’s consumer price inflation has averaged
12 percent since 1997 and 8½ percent since the
formal adoption of inflation targeting in
July 2005. By comparison, some of its Asian
comparators have averaged about 3−6 percent
inflation since July 2005, while Mexico and
Brazil have averaged about 4−5 percent inflation
in this period.
Indonesia’s inflation volatility also has been, on
average, sharply higher than its peers, and the
volatility in Indonesia is highly correlated with
administered price adjustments. In the two most
recent episodes of price hikes—in 2005
and 2008—volatility spiked significantly.1/
Moreover, energy price adjustments and core
inflation are also highly correlated because of
second-round effects from the adjustment.
The high volatility has also contributed to
uncertainty over estimates of Indonesia’s future
inflation rates. The dispersion of inflation survey
forecasts (Consensus Forecasts)—which is used in the
literature as a proxy for market uncertainty about the
future inflation rate—shows that Indonesia has the
highest standard deviation among forecasts for one-
year ahead inflation.2/
Thus, ad hoc adjustments to administered prices
create uncertainty over inflationary expectations,
affecting monetary policy. When the central bank is
unable to anchor inflation expectations due to
inflation volatility, its policy credibility is
undermined, leading to higher inflationary risk
premium—i.e., additional cost of borrowing and
lower growth.3/
__________________________________
1/ Fuel price adjustments were also made in 1998, 2000, and 2002, which also resulted in high volatility.
2/ Wright, J., ―Term Premiums and Inflation Uncertainty: Empirical Evidence from an International Panel
Dataset,‖ Finance and Economics Discussion Series 2008−25, Board of Governors of the Federal Reserve
System.
3/ See Chapter II of the selected issues.
0%
10%
20%
30%
40%
50%
-10%
-5%
0%
5%
10%
15%
20%
25%
Jan-0
3
Jun-0
3
Nov-0
3
Apr-
04
Sep-0
4
Feb-0
5
Jul-05
Dec-0
5
May-0
6
Oct-
06
Mar-
07
Aug-0
7
Jan-0
8
Jun-0
8
Nov-0
8
Apr-
09
Sep-0
9
Feb-1
0
Consumer Price Inflation(Year-on-year, in percent)
Indonesia
Malaysia
Philippines
Thailand
Indonesia (administered price, right scale)
-1%
1%
3%
5%
7%
9%
11%
13%
15%
Jan-0
3
May-0
3
Sep-0
3
Jan-0
4
May-0
4
Sep-0
4
Jan-0
5
May-0
5
Sep-0
5
Jan-0
6
May-0
6
Sep-0
6
Jan-0
7
May-0
7
Sep-0
7
Jan-0
8
May-0
8
Sep-0
8
Jan-0
9
May-0
9
Sep-0
9
Jan-1
0
Inflation Volatility 1/
Indonesia Malaysia
Philippines Thailand
Mexico
1/ Twelve-month rolling volatility based on annual average inflation.
0
0.5
1
1.5
2
2.5
01
/10
/03
05
/09
/03
09
/12
/03
01
/12
/04
05
/10
/04
09
/13
/04
01
/10
/05
05
/09
/05
09
/12
/05
01
/09
/06
05
/08
/06
09
/11
/06
01
/08
/07
05
/14
/07
09
/10
/07
01
/14
/08
05
/12
/08
09
/08
/08
01
/12
/09
05
/11
/09
09
/14
/09
01
/11
/10
Indonesia
Malaysia
Mexico
Thailand
Standard Deviation of Year-Ahead CPI Consensus Forecasts
19
Sustained fiscal reforms to improve the quality and efficiency of fiscal institutions are
also necessary to support long
term growth. In particular,
improved budget execution,
including better coordination with
line ministries, is critical to
strengthen fiscal policy
effectiveness. To raise tax revenue
ratios from the current level,
which is one of the lowest in the
G-20, continued efforts are
needed to broaden the tax base
and improve tax administration,
including improving arrears collection, taxpayer registration, and audit functions.
29. Authorities’ views: There was broad agreement with staff, especially on raising
revenue ratios, broadening the tax base, and improving budget execution, particularly relating
to spending by line ministries. The authorities also noted ongoing efforts to enforce
compliance and reduce tax fraud. The authorities stressed their commitment to reduce
subsidies, but were not in a position to specify a timeframe for action.
V. STAFF APPRAISAL
30. Indonesia has shown resilience during shifts in external conditions. Strong
balance sheets, relatively low dependence on external demand, and appropriate policy
responses helped support domestic demand through the crisis. Indeed, Indonesia was the only
country in the G-20 to lower its public debt-to-GDP ratio in 2009. This strong performance,
combined with higher global risk appetite, has contributed to large portfolio inflows from the
second half of 2009. While market turbulence in May prompted some pullout of foreign
investment, inflows have since returned.
31. Continuing to achieve the appropriate policy mix through the ongoing volatile
external conditions, while supporting sustained high growth, are the main policy
challenges. Despite the strong ongoing recovery in growth, volatile capital flows are
complicating monetary management and the timing of removal of policy accommodation in
the near term. In addition, for achieving sustained high growth and macroeconomic stability,
enhancing financial sector resilience and development based on the FSAP findings is a top
priority. Fiscal reforms to support medium-term investment and growth are also necessary.
32. Unstable movements in foreign capital flows complicate policy management.
Conventional measures to manage the surge in inflows—allowing rupiah appreciation and
modest international reserve accumulation—have worked well. Continued exchange rate
flexibility in both directions will continue to be an important tool to manage volatility.
0
10
20
30
40
50
SA
U
IDN
ME
X
CH
N
IND
TU
R
KO
R
US
A
JP
N
AU
S
ZA
F
AR
G
CA
N
BR
A
RU
S
GB
R
DE
U
ITA
FR
A
Tax Revenue/GDP(In percent)
20
Concerns about competitiveness in the manufacturing sector due to rupiah appreciation could
be addressed by removing supply constraints. Rising sterilization costs are a concern,
underscoring the need to make the nonmarketable government bonds in BI’s balance sheet
marketable, which would help expand BI’s operational toolkit. In this regard, the recent
measures introduced by BI could improve monetary management and help lower volatility in
short-term capital flows.
33. BI’s holding stance is appropriate for now, but looking forward, signaling
readiness to respond to inflationary pressures is necessary to anchor expectations
within the target range. Expectations for 2011 are at the top end of the target range of
4−6 percent, and several risk factors could push it higher. Taking into account an estimated
Taylor rule, unwinding may need to start in the second half of 2010, broadly consistent with
market expectations. Moreover, continued effective communication of a proactive stance
would signal BI’s commitment to lower inflation and reduce its volatility to trading partner
levels. Avoiding administrative measures to fuel credit growth is important to avert conflicts
with banks’ prudential policies and risk management practices.
34. The FSAP confirms the sustained improvements in financial sector stability and
identifies additional reform priorities. Some banks remain vulnerable to credit and
liquidity risks. This highlights the need to improve coordination of macro and micro
prudential supervision, and develop a crisis management framework for quick resolution of
problem banks, including adoption of the Financial Safety Net law. Addressing weaknesses
in the legal mandate for supervision and governance structures in financial institutions are
also essential to further enhance stability. More generally, strengthening enforcement of
creditors’ rights and developing a deeper capital market will help improve financial
intermediation and deliver a more diverse funding base to promote long-term investment.
35. Fiscal reforms are necessary to enhance policy effectiveness and support
sustained high growth. Improved budget execution of development spending is critical for a
more effective fiscal policy. Also, increasing non-commodity based revenues and phasing
out energy subsidies, combined with expanding transfer programs and social services for the
poor, are important to create additional fiscal space for infrastructure development.
36. It is proposed that the next Article IV consultation take place on the standard
12-month cycle.
21
Figure 1. Indonesia: Macroeconomic Developments and Outlook
GDP growth was resilient in 2009, with strong growth
projected in 2010…
…amid broad-based growth across sectors.
-3
0
3
6
9
12
07Q1 07Q4 08Q3 09Q2 10Q1 10Q4
Net exports Domestic demand
GDP growth, y/y
Contribution to GDP Growth(In percent)
Projection
-3
0
3
6
9
12
07Q1 07Q3 08Q1 08Q3 09Q1 09Q3 10Q1
Primary Secondary Tertiary GDP growth, y/y
GDP Growth(In percent, year-on-year)
The recovery in exports has been supported by non-
oil and gas commodities…
… driving export growth to exceed that of regional
peers.
-40
-20
0
20
40
60
80
100
0
5
10
15
20
25
30
35
40
45
50
2007Q1 2007Q3 2008Q1 2008Q3 2009Q1 2009Q3 2010Q1
Noncommodities
Oil and gas
Commodities excluding oil and gas
Volume growth (In percent y/y, right scale)
Exports of Goods(In billions of U.S. dollar)
-50
-20
10
40
70
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Indonesia Thailand
Malaysia Singapore
Philippines India
Exports of Goods(In percent, year-on-year growth of 3-mma, s.a.)
Domestic demand is supporting a pickup in imports…
…however, the current account has remained in
surplus.
-60
-40
-20
0
20
40
60
80
100
Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10
Consumer goods
Raw materials
Capital goods
Import Growth(In percent, year-on-year)
-4
-2
0
2
4
6
-40
-20
0
20
40
60
07Q1 07Q3 08Q1 08Q3 09Q1 09Q3 10Q1
Export value growth y/y
Import value growth y/y
CA/GDP (right scale)
Trade Growth and Current Account
Source: CEIC Data Co., Ltd.; and IMF staff calculations and estimates.
22
Figure 2. Indonesia: Business Activity Indicators
High frequency indicators show a rebound in business
activity, with retail sales rising,…
…cement sales picking up,…
-30
-20
-10
0
10
20
30
40
50
50
70
90
110
130
150
170
190
210
230
250
Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10
3-month moving average of index Oct. 2000=100
Year-on-year growth (right scale)
Retail Sales
-15
-10
-5
0
5
10
15
20
25
30
1,000
1,200
1,400
1,600
1,800
Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10
3-month moving average ('000 tons)
Year-on-year growth (right scale)
Cement Sales
…industrial production surging since the start of last
year…
…and motor vehicle sales on a steady upward trend.
-4
-2
0
2
4
6
8
10
12
118
120
122
124
126
128
130
132
134
Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10
3-month moving average of index 2000=100
Year-on-year growth (right scale)
Industrial Production
-40
-20
0
20
40
60
80
100
120
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10
3-month moving average (units)
Year-on-year growth (right scale)
Motor Vehicle Sales
Motor cycle sales also rebounded from post-crisis
lows…
…as consumer confidence has remained buoyant.
-40
-20
0
20
40
60
80
300,000
350,000
400,000
450,000
500,000
550,000
600,000
650,000
700,000
Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10
3-month moving average (units)
Year-on-year growth (right scale)
Motorcycle Sales
70
75
80
85
90
95
100
105
110
115
120
70
75
80
85
90
95
100
105
110
115
120
Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10
Consumer Confidence(Index above 100 indicates optimism)
Source: CEIC Data Co., Ltd.; and IMF staff calculations.
23
Figure 3. Indonesia: Inflation and Monetary Developments
Inflation started to decelerate in October 2008… …as a result of food and commodity price declines
and slower domestic demand.
2
4
6
8
10
12
14
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Headline, year-on-year
Core, year-on-year
CPI Inflation(In percent, year-on-year)
Inflation target
H
L
-10
-5
0
5
10
15
20
25
30
Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10
Headline
Food
Processed food
Housing
Clothing
Health
Education
Transportation
Inflation Components(In percent, year-on-year)
Credit growth declined during the crisis, but has
started to recover as money growth has risen…
…along with aggressive monetary policy easing.
-20
-10
0
10
20
30
40
Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10
Credit Excess liquidity (4Q m.a.) Base money (y/y 3-month m.a.)
Credit and Money Growth(In percent, year-on-year)
5
6
7
8
9
10
11
12
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
SBI 1-month
Bank Indonesia rate
JJIBOR O/N
Interest Rates(In percent per annum)
After supporting the market with liquidity during the
crisis, BI has since increased draining operations,
…and real short-term interest rates are near the top of
the estimated neutral window.
0
50
100
150
200
250
300
350
400
May-08 Aug-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10
FASBI O/N FTO SBI Wadiah SBI 6-M SBI 3-M SBI 1-M
OMO Outstanding(In trillions rupiah)
-4
-3
-2
-1
0
1
2
3
4
5
6
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10
Headline Core
Real SBI 1-Month Interest Rates(In percent per annum)
Source: CEIC Data Co., Ltd.; Country authorities; and IMF staff calculations.
24
Figure 4. Indonesia: Financial Market Performance
The stock market has surged past pre-crisis levels,
with effects from European debt crisis short lived…
…while sovereign external debt spreads have also
recovered.
0
200
400
600
800
1,000
1,200
1,400
Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10
Malaysia
Indonesia
Philippines
Thailand
CDS Five-Year Spreads(In basis points)
Though still higher than peers, local currency debt
yields have also fallen to pre-crisis levels.
Foreign demand for SUNs has been steady, despite
outflows from SBI’s during the European debt crisis.
2
6
10
14
18
22
Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10
Government Bonds Yield(In percent, 10-year bonds)
Indonesia
Philippines
Thailand
Asia (GBI-EM)
-6,000
-4,000
-2,000
0
2,000
4,000
6,000
2008Q1 2008Q4 2009Q3 2010Q2
SBI SUN Stocks
Net Foreign Buying(In millions of U.S. dollar)
Indonesia’s degree of exchange rate flexibility during
the crisis and post-crisis has been high…
…even amid the increase in foreign exchange reserve
in response to recent inflows.
70
80
90
100
110
120
130
140
150
Jan-08 Jun-08 Nov-08 Apr-09 Sep-09 Feb-10 Jul-10
Indonesia
Philippines
Thailand
Exchange Rates(National currency/U.S. dollar, January 2, 2007 = 100)
Source: CEIC Data Co., Ltd.; Bloomberg L.P.; Country authorities; and IMF staff calculations.
25
Figure 5. Indonesia: Banking Sector Indicators
Banks lowered retail lending rates only slightly in
response to their lower funding costs...
...supporting a high interest margin.
0
1
2
3
4
5
6
5
7
9
11
13
15
17
Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10
Spreads (right scale)
Lending
Deposit
Interest Rates Spreads(In percent per annum)
2.0
2.5
3.0
3.5
5.0
5.5
6.0
6.5
Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10
Bank Profitability
Net interest margin
Return on assets (right scale)
Loan loss reserve coverage remains ample... …with asset quality remaining relatively robust.
0
20
40
60
80
100
120
140
0
2
4
6
8
10
12
14
16
18
2004 2005 2006 2007 2008 2009
Asset Quality(In percent)
NPL/total loans
Special mention/total loans
Loan loss reserve coverage (right scale)
0
2
4
6
8
10
12
14
16
18
20
2002 2003 2004 2005 2006 2007 2008 2009
State owned
Private owned
All banks
Foreign owned
Nonperforming Loans(In percent of total loans)
Capital asset ratios of banks have improved
recently…
…and default probabilities have fallen in line with the
recovery in the stock market.
10
15
20
25
30
35
40
Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10
All State
Foreign Private national
Capital Adequacy Ratio
0
2
4
6
8
10
12
Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10
Thailand
Malaysia
Indonesia
Korea
Philippines
Default Probabilities for Banks(75th percentile, in percent)
Source: CEIC Data Co., Ltd.; Country authorities; Moody’s KMV; and IMF staff calculations.
26
Figure 6. Indonesia: Corporate Sector Indicators
Investment credit growth has picked up, though
working capital credit has so far remained sluggish.
The recovery in credit is benefiting both large and
smaller firms.
0
10
20
30
40
50
60
70
Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09
Large corporates
SMEs
Bank Credit Growth(Year-on-year percentage change)
Sectors related to infrastructure investment are
gaining a greater share of credit distribution…
…and corporate balance sheets are relatively liquid in
aggregate…
0
5
10
15
20
25
30
35
40
Ma
nu
factu
rin
g
Tra
din
g, r
esta
ura
nts
, a
nd
ho
tel
Bu
sin
ess s
erv
ice
Tra
nsp
ort
ation
an
d
co
mm
un
icatio
ns
Ag
ricu
ltu
re
Co
nstr
uction
Min
ing
Oth
ers
Ele
ctr
icity, g
as, a
nd
w
ate
r
So
cia
l co
mm
un
ity
se
rvic
es
Oth
ers
2008 2009
Sector Distribution of Credit(In percent of total loan exposure)
0
50
100
150
200
250
300
350
400
0
20
40
60
80
100
120
140
160
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
ST debt/total debt
Quick ratio
Debt/equity (right scale)
Balance Sheet Indicators(In percent)
Though still patchy, domestic corporate bond
issuance has picked up...
…as default probabilities have declined with the surge
in the equity market.
0
20,000
40,000
60,000
80,000
100,000
0
2,000
4,000
6,000
8,000
10,000
12,000
Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10
New issuance
Outstanding (right scale)
Domestic Corporate Bonds (In billions rupiah, traded through Bapepam)
0
2
4
6
8
10
12
May-08 Oct-08 Mar-09 Aug-09 Jan-10 Jun-10
Thailand Indonesia Korea
Malaysia Philippines
Default Probabilities for Corporates(75th percentile, in percent)
Source: CEIC Data Co., Ltd.; Country authorities; and Moody’s KMV; and IMF staff calculations.
27
Nominal GDP (2009): Rp 5,613 trillion or US$539 billion
Main exports (percent of total, 2009): mineral fuels (30), manufactured goods (16), machinery and transport equipment (15)
GDP per capita (2009): US$2,330
Unemployment rate (2009): 7.9
Poverty headcount ratio at national poverty line (2009): 14.1 percent of population
2007 2008 2009 2010 2011
Real GDP (percent change) 6.3 6.1 4.5 6.0 6.2
Domestic demand 4.1 7.6 5.3 5.8 6.3
Of which:
Private consumption 5.0 5.3 4.9 5.5 5.5
Gross fixed investment 9.4 11.9 3.3 7.9 8.5
Change in stocks 1/ -1.6 0.1 -0.1 0.0 0.0
Net exports 1/ 0.6 0.7 1.2 0.8 0.6
Statistical discrepancy 1/ 1.9 -1.4 -1.4 0.0 0.0
Saving and investment (in percent of GDP)
Gross investment 2/ 25.0 27.7 31.1 32.0 32.8
Gross national saving 27.4 27.7 33.0 32.9 32.8
Foreign saving (external current account balance) -2.4 0.0 -2.0 -0.8 0.0
Prices (12-month percent change)
Consumer prices (end period) 5.6 11.1 2.8 5.7 5.6
Consumer prices (period average) 6.2 9.8 4.8 4.7 5.7
Public finances (in percent of GDP)
Central government revenue 17.9 19.8 15.5 15.1 15.3
Central government expenditure 19.1 19.9 17.1 17.0 17.0
Central government balance -1.2 -0.1 -1.6 -1.9 -1.7
Primary balance 0.8 1.7 0.1 -0.2 -0.1
Central government debt 36.9 33.2 28.6 27.0 26.3
Money and credit (12-month percent change; end of period)
Rupiah M2 19.5 12.6 13.9 ... ...
Base money 26.5 -2.9 17.2 ... ...
Total credit 27.5 30.8 10.1 ... ...
One-month SBI rate (period average) 8.6 9.1 7.4 ... ...
Balance of payments (in billions of U.S. dollars)
Oil and gas (net) 5.7 7.8 8.3 6.3 5.1
Non-oil exports (f.o.b) 93.1 107.9 99.1 121.6 127.2
Non-oil imports (f.o.b) -66.1 -92.8 -72.2 -94.0 -102.5
Current account balance 10.5 0.1 10.6 5.8 0.2
Foreign direct investment 2.3 3.4 1.9 4.5 6.2
Overall balance 12.7 -1.9 12.4 14.4 7.5
Gross reserves
In billions of U.S. dollars (end period) 54.1 52.1 66.1 80.5 87.9
In months of imports 4.5 5.6 5.5 6.2 6.3
As a percent of short-term debt 3/ 157.4 141.5 203.7 220.6 218.2
Total external debt
In billions of U.S. dollars 137.4 149.7 172.8 187.7 196.0
In percent of GDP 31.8 29.3 32.0 27.3 25.7
Exchange rate (period average)
Rupiah per U.S. dollar 9,141 9,439 10,354 ... ...
Nominal effective exchange rate (Jan. 2000=100) 80.9 73.6 69.7 ... ...
Memorandum items:
Oil production (000bcpd) 899 927 960 965 970
Indonesian oil price (US$/bbl) 70.7 96.6 61.4 74.9 77.1
Nominal GDP (in trillions of rupiah) 3,957 4,954 5,613 6,288 7,061
Nominal GDP (in billions of U.S. dollars) 433 512 539 689 761
Sources: Data provided by the Indonesian authorities; and Fund staff estimates.
1/ Contribution to GDP growth (percentage points).
2/ Includes changes in stocks.
3/ Short-term debt on a remaining maturity basis.
Actual Proj.
Table 1. Indonesia: Selected Economic Indicators, 2007–11
28
2006 2007 2008 2009 2010 2011
Act. Act. Act. Act. Proj. Proj.
Current account 10.9 10.5 0.1 10.6 5.8 0.2
Goods, net (trade balance) 29.7 32.8 22.9 35.2 34.0 29.8
Exports, f.o.b. 103.5 118.0 139.6 119.5 146.4 153.0
Of which: Oil and gas 23.0 24.9 31.7 20.5 24.8 25.9
Non-oil and gas 80.6 93.1 107.9 99.1 121.6 127.2
Imports, f.o.b. -73.9 -85.3 -116.7 -84.3 -112.4 -123.2
Of which: Oil and gas -16.2 -19.2 -23.9 -12.1 -18.5 -20.7
Non-oil and gas -57.7 -66.1 -92.8 -72.2 -94.0 -102.5
Services, net -9.9 -11.8 -13.0 -14.2 -15.9 -16.5
Income, net -13.8 -15.5 -15.2 -15.3 -17.2 -18.2
Current transfers, net 4.9 5.1 5.4 4.9 4.9 5.1
Capital and financial account 2.8 3.6 -1.9 3.5 8.6 7.3
Capital account 0.4 0.5 0.3 0.1 0.1 0.1
Financial account 2.4 3.0 -2.2 3.5 8.5 7.2
Direct investment, net 2.2 2.3 3.4 1.9 4.5 6.2
Abroad, net -2.7 -4.7 -5.9 -2.9 -4.0 -4.0
In Indonesia (FDI), net 4.9 6.9 9.3 4.9 8.5 10.1
Portfolio investment, net 4.3 5.6 1.7 10.3 10.1 6.2
Other investment -4.1 -4.8 -7.3 -8.8 -6.0 -5.2
Nonfinancial public sector -2.8 -2.4 -1.4 -1.2 0.8 0.3
Banking sector 0.4 0.1 1.4 0.7 0.7 0.4
Corporate sector -0.8 1.1 2.8 2.4 2.2 2.1
Disbursements 6.0 8.1 10.9 11.3 12.2 12.9
Repayments -6.8 -7.0 -8.1 -8.8 -10.1 -10.7
Other 1/ -0.9 -3.6 -10.1 -10.7 -9.7 -8.0
Total 13.6 14.1 -1.8 14.1 14.4 7.5
Errors and omissions 0.6 -1.4 -0.2 -1.7 0.0 0.0
Overall balance 14.2 12.7 -1.9 12.4 14.4 7.5
Reserves and related items -14.5 -12.7 1.9 -12.4 -14.4 -7.5
Memorandum items:
Reserve assets position (eop) 42.6 56.9 51.6 66.1 80.5 87.9
in months of imports of goods and services 4.7 4.7 5.5 5.5 6.2 6.3
in percent of short-term debt at remaining maturity 200 197 177 204 221 218
Current account (percent of GDP) 3.0 2.4 0.0 2.0 0.8 0.0
Non-oil and gas exports, volume growth 5.2 -0.3 2.1 7.9 6.8 7.5
Non-oil and gas imports, volume growth 2.1 4.5 28.3 -14.7 18.5 9.2
Terms of trade, percent change (excluding oil) 8.5 5.8 3.6 -6.8 1.3 -1.3
Terms of trade, percent change (including oil) 5.2 3.8 2.5 -5.2 -0.7 -0.8
Stock of nonfinancial public sector external debt 2/ 76.7 81.0 89.5 105.5 117.8 123.2
in percent of GDP 21.0 18.7 17.5 19.6 17.1 16.2
Nonfinancial public sector debt service (percent of exports) 12.1 6.9 6.5 8.0 5.9 5.8
Indonesian oil price 63.9 70.7 96.6 61.4 74.9 77.1
Sources: Data provided by Bank Indonesia; and Fund staff estimates.
2/ Includes non-financial state-owned enterprises.
1/ Includes unrecorded capital flows and exceptional financing.
Table 2. Indonesia: Balance of Payments, 2006–11
(In billions of U.S. dollars)
29
2005 2006 2007 2009
Dec Dec Dec Dec Dec
Bank Indonesia
Net foreign assets 255.7 380.9 534.1 561.8 618.2
Net domestic assets 14.2 -34.4 -95.6 -136.0 -119.2
Net claims on government 249.5 274.2 264.5 191.2 225.7
Net claims on financial corporations -74.4 -165.4 -192.4 -151.2 -169.6
Others -160.8 -143.2 -167.8 -176.0 -175.3
Base money 270.0 346.5 438.5 425.8 499.0
Monetary survey
Net foreign assets 307.4 405.2 513.9 596.8 807.4
Net domestic assets 895.4 977.3 1135.7 1299.0 941.1
Net claims on nonfinancial public sector 520.8 539.6 558.4 450.3 505.9
Total credit outstanding 733.2 821.6 1005.7 1314.0 1408.7
Others -358.6 -383.9 -428.4 -465.3 -973.6
Broad money 1202.8 1382.5 1649.7 1895.8 2141.4
Rupiah, M2 1016.8 1199.8 1433.9 1614.9 1838.8
Currency in circulation 124.0 150.7 183.0 209.7 226.0
Deposits 892.9 1049.2 1250.9 1405.1 1612.8
Foreign exchange 185.9 182.7 215.8 281.0 302.6
Memorandum items:
NIR of BI (US$ billions) 26.8 42.3 56.5 51.1 56.4
Money multiplier (rupiah M2) 3.8 3.5 3.3 3.8 3.7
Base money velocity 1/ 11.2 10.1 9.4 12.1 11.6
Rupiah broad money velocity 1/ 2.5 2.5 2.5 2.7 2.7
Annual percentage change:
Broad money 16.3 14.9 19.3 14.9 13.0
Rupiah broad money 13.1 18.0 19.5 12.6 13.9
Base money 30.9 28.3 26.5 -2.9 17.2
Total credit outstanding 28.4 12.7 27.5 30.8 10.1
Sources: IMF, International Financial Statistics; and IMF staff estimates.
1/ Calculated using end-period quarterly GDP, annualized.
2008
Table 3. Indonesia: Monetary Survey, 2005–09
(In trillions of rupiah, unless otherwise indicated, end of period)
30
2011
2006 2007 2008 Revised Prel. Staff Approved Staff Staff
Act. Act. Act. Budget Outturn est. budget proj. proj.
Revenues and grants 627 706 982 871 870 870 992 951 1080
Oil and gas revenues 201 168 289 177 176 176 207 202 213
Tax revenues 43 44 77 49 50 50 55 54 57
Nontax revenues 158 124 210 128 126 126 152 148 156
Non-oil and gas revenues 424 536 691 693 693 693 783 747 866
Tax revenues 366 447 582 603 591 591 688 651 758
Nontax revenues 58 88 109 90 101 101 95 95 108
Grants 2 2 2 1 1 1 2 2 1
Expenditure and net lending 659 754 986 1001 957 957 1126 1070 1200
Current expenditure 338 385 563 540 500 500 624 575 623
Personnel 73 90 113 134 128 128 162 154 175
Subsidies 107 150 275 158 160 160 201 183 178
Of which : energy subsidies 64 117 223 100 95 95 144 126 117
Interest 79 80 88 110 94 94 106 103 116
Other 79 65 86 139 119 119 154 135 154
Development expenditure 1/ 102 115 131 151 148 148 158 155 205
Transfers to regions 226 253 292 309 309 309 345 339 372
Revenues and grants 18.8 17.9 19.8 16.1 16.1 15.5 15.9 15.1 15.3
Oil and gas revenues 6.0 4.3 5.8 3.3 3.3 3.1 3.3 3.2 3.0
Non-oil and gas revenues 12.7 13.6 13.9 12.8 12.8 12.3 12.5 11.9 12.3
Tax revenues 11.0 11.3 11.7 11.2 10.9 10.5 11.0 10.4 10.7
Nontax revenues 1.7 2.2 2.2 1.7 1.9 1.8 1.5 1.5 1.5
Grants 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Expenditure and net lending 19.7 19.1 19.9 18.5 17.7 17.1 18.0 17.0 17.0
Current expenditure 10.1 9.7 11.4 10.0 9.3 8.9 10.0 9.1 8.8
Personnel 2.2 2.3 2.3 2.5 2.4 2.3 2.6 2.5 2.5
Subsidies 3.2 3.8 5.6 2.9 3.0 2.8 3.2 2.9 2.5
Of which : energy subsidies 1.9 3.0 4.5 1.9 1.8 1.7 2.3 2.0 1.7
Interest 2.4 2.0 1.8 2.0 1.7 1.7 1.7 1.6 1.6
Other 2.4 1.7 1.7 2.6 2.2 2.1 2.5 2.1 2.2
Development expenditure 1/ 3.1 2.9 2.6 2.8 2.7 2.6 2.5 2.5 2.9
Transfers to regions 6.8 6.4 5.9 5.7 5.7 5.5 5.5 5.4 5.3
Overall balance -1.0 -1.2 -0.1 -2.4 -1.6 -1.6 -2.1 -1.9 -1.7
Financing 1.0 1.2 0.1 2.5 2.1 1.6 2.1 1.9 1.7
Domestic 1.0 1.5 -0.4 2.7 2.4 1.2 2.1 1.3 1.5
External 0.0 -0.3 0.5 -0.2 -0.3 0.3 0.0 0.6 0.2
Memorandum items:
Primary balance 1.4 0.8 1.7 -0.4 0.1 0.1 -0.4 -0.2 -0.1
Public debt to GDP 40.4 36.9 33.2 ... ... 28.6 27.0 26.3
Sources: Data provided by the Indonesian authorities; and Fund staff estimates.
1/ Comprises capital spending and social assistance spending.
Table 4. Indonesia: Summary of Central Government Operations, 2006–11
(In trillions of rupiah)
(In percent of GDP)
2009 2010
31
Latest
2005 2006 2007 2008 2009 2010 1/ Observation
Key economic and market indicators
Real GDP growth (in percent) 5.7 5.5 6.3 6.1 4.5 6.0 Proj.
CPI inflation (in percent) 17.1 6.6 5.6 11.1 2.8 5.7 Proj.
Short-term (ST) interest rate (in percent) 12.8 9.8 8.0 11.0 6.5 6.5 Jun-10
EMBI spread (bps, end of period) 269 153 275 381 230 328 Jun-10
Exchange rate NC/US$ (end of period) 9,830 8,990 9,395 10,900 9,457 9,008 Jun-10
External sector
Exchange rate regime
Current account balance (percent of GDP) 0.1 3.0 2.4 0.0 2.0 0.8 Proj.
Net FDI inflows (percent of GDP) 1.8 0.6 0.5 0.7 0.4 0.6 Proj.
Exports (percentage change of US$ value, GNFS) 20.7 15.1 13.4 18.7 -14.0 20.8 Proj.
Real effective exchange rate (end period; Jan. 2000=100) 125.0 135.2 128.3 119.5 137.5 148.6 May-10
Gross international reserves (GIR) in US$ billion 34.7 42.6 56.9 51.6 66.1 74.6 May-10
GIR in percent of ST debt at remaining maturity (RM) 145.7 200.4 196.7 176.7 203.7 220.6 Proj.
Total gross external debt in percent of exports of GNFS 133.0 113.5 105.9 100.1 129.7 116.6 Proj.
Gross external financing requirement (US$ billion) 2/ 26.7 32.8 33.6 59.1 47.2 54.0 Proj.
Public sector (PS) 3/
Overall balance (percent of GDP) -0.3 -1.0 -1.2 -0.2 -1.6 -1.9 Proj.
Primary balance (percent of GDP) 2.1 1.4 0.8 1.6 0.1 -0.2 Proj.
Gross PS financing requirement (in percent of GDP) 4/ 3.2 3.4 3.6 2.1 3.6 3.1 Proj.
Public sector gross debt (PSGD, in percent of GDP) 45.8 39.0 35.1 33.2 28.6 27.0 Proj.
Of which : Exposed to rollover risk (in percent of total PSGD) 5/ 4.3 6.0 2.4 1.9 2.0 1.2 Proj.
Exposed to exchange rate risk (in percent of total PSGD) 6/ 51.1 46.1 47.0 51.6 46.4 45.4 Proj.
Exposed to interest rate risk (in percent of total PSGD) 7/ 16.6 15.7 12.4 9.2 9.4 8.7 Proj.
Financial sector (FS)
Capital adequacy ratio (in percent) 19.3 21.3 19.3 16.8 17.4 19.3 Mar-10
NPLs in percent of total loans 7.4 6.0 4.1 3.2 3.3 3.2 Apr-10
Provisions in percent of NPLs 8/ 38.1 49.1 59.8 58.5 62.0 NA
FX deposits (in percent of total deposits) 13.1 15.5 14.6 16.6 15.7 15.8 May-10
FX loans (in percent of total loans) 16.0 18.8 20.1 18.5 13.9 12.9 Apr-10
Government debt held by FS ( percent of total FS assets) 21.9 18.5 13.0 9.3 9.0 10.6 Apr-10
Total credit outstanding (percent change) 19.7 12.8 26.0 30.8 10.1 18.6 Jun-10
8/ Data compiled in conjunction with the FSAP.
5/ Short-term debt and maturing medium- and long-term debt, domestic and external, excluding external debt to official creditors.
6/ Debt in foreign currency or linked to the exchange rate, domestic and external, excluding external debt on concessional terms.
7/ Short-term debt and maturing medium- and long-term debt at variable interest rates for domestic debt. Information on external debt is
not available.
Table 5. Indonesia: Selected Vulnerability Indicators, 2005–10
(Float)
3/ Public sector covers central government.
4/ Overall balance plus debt amortization.
1/ Staff estimates, projections, or latest available observations as indicated in the last column.
2/ Current account deficit plus amortization of external debt.
32
2008 2009 2010 2011 2012 2013 2014 2015
Real GDP (percent change) 6.1 4.5 6.0 6.2 6.5 6.7 7.0 7.0
Domestic demand 7.6 5.3 5.8 6.3 6.6 6.7 7.0 7.2
Of which:
Private consumption 5.3 4.9 5.5 5.5 5.7 5.8 5.8 5.9
Gross fixed investment 11.9 3.3 7.9 8.5 9.8 10.1 10.6 11.4
Change in stocks 1/ 0.1 -0.1 0.0 0.0 0.0 0.0 0.0 0.0
Net exports 1/ 0.7 1.2 0.8 0.6 0.6 0.7 0.7 0.5
Statistical discrepancy 1/ -1.4 -1.4 0.0 0.0 0.0 0.0 0.0 0.0
Saving and investment (in percent of GDP)
Gross investment 2/ 27.7 31.1 32.0 32.8 33.9 35.5 37.0 38.6
Gross national saving 27.7 33.0 32.9 32.8 33.4 34.6 36.0 37.5
Foreign saving (external current account balance) 0.0 -2.0 -0.8 0.0 0.6 0.9 1.0 1.1
Prices (12-month percent change)
Consumer prices (end period) 11.1 2.8 5.7 5.6 4.9 4.3 4.0 3.6
Consumer prices (period average) 9.8 4.8 4.7 5.7 5.2 4.5 4.2 3.8
Public finances (in percent of GDP)
Central government revenue 19.8 15.5 15.1 15.3 15.5 15.7 15.9 16.2
Central government expenditure 19.9 17.1 17.0 17.0 17.1 17.3 17.5 17.8
Central government balance -0.1 -1.6 -1.9 -1.7 -1.6 -1.6 -1.6 -1.5
Primary balance 1.7 0.1 -0.2 -0.1 -0.1 0.0 0.0 -0.1
Central government debt 33.2 28.6 27.0 26.3 25.5 24.7 24.0 23.3
Balance of payments (US$ billions)
Oil and gas (net) 7.8 8.3 6.3 5.1 3.9 2.0 0.3 -1.4
Non-oil exports (f.o.b) 107.9 99.1 121.6 127.2 132.7 141.4 152.4 162.7
Non-oil imports (f.o.b) -92.8 -72.2 -94.0 -102.5 -110.0 -119.2 -128.6 -137.1
Current account balance 0.1 10.6 5.8 0.2 -4.7 -8.6 -10.4 -12.2
Direct foreign investment 3.4 1.9 4.5 6.2 7.4 8.2 9.4 10.8
Overall balance -1.9 12.4 14.4 7.5 6.1 3.7 3.4 3.7
Gross reserves
In billions of U.S. dollars (end period) 52.1 66.1 80.5 87.9 94.0 97.8 101.2 104.9
In months of imports 5.6 5.5 6.2 6.3 6.2 6.0 5.8 5.8
As a percent of short-term debt 3/ 141.5 203.7 220.6 218.2 211.9 204.4 189.4 182.8
Total external debt
In billions of U.S. dollars 149.7 172.8 187.7 196.0 205.3 214.6 225.7 238.2
In percent of GDP 29.3 32.0 27.3 25.7 24.5 23.2 22.0 21.0
Memorandum items:
Oil production (000bcpd) 927 960 965 970 970 974 979 994
Indonesian oil price (US$/bbl) 96.6 61.4 74.9 77.1 79.9 81.6 83.1 85.1
Nominal GDP (US$ billions) 512 539 689 761 839 925 1,025 1,133
Sources: Data provided by the Indonesian authorities; and Fund staff estimates.
1/ Contribution to GDP growth.
2/ Includes changes in stocks.
3/ Short-term debt on a remaining maturity basis.
Proj.Act.
Table 6. Indonesia: Medium-Term Macroeconomic Framework, 2008–15
33
APPENDIX I: INDONESIA—CAPITAL INFLOWS AND POLICY RESPONSE
Indonesia’s strong growth trajectory and high interest rate environment have attracted
capital inflows over the last few quarters. The rapidity of the inflows complicates
economic management and also raises susceptibility to sharp outflows when investor risk
appetite declines, as seen in May amid concerns about the European debt situation.
Indonesia has followed an appropriate policy response to capital inflows, allowing
sharp rupiah appreciation, with real appreciation far exceeding that of regional peers.
Reserve accumulation has also increased, with the stock of net international reserves at
US$75 billion in May 2010 compared with US$57 billion as of June 2009. According to
some standard metrics of minimum reserve adequacy, Indonesia appears to have adequate
buffers (with gross reserves as a percent of short-term debt at remaining maturity at
about 200 percent, coverage of imports of goods and services at 5.5 months, and coverage of
M2 at 28 percent as of end 2009.1 However, Indonesia’s continued vulnerability to shifts in
external sentiment, most recently evidenced by the sharp loss of reserves during the 2008
crisis, suggests some scope remains for incremental reserve accumulation.2 The most recent
measure introducing a one-month holding period on all BI certificates (SBIs) is expected to
reduce short-term volatility in capital flows.
1 Standard reserves benchmarks include: coverage of 100 percent of short-term debt at remaining maturity, 20
percent of M2, and four months of imports.
2 Staff analysis in ―Adequacy of Indonesia’s Foreign Exchange Reserves,‖ Indonesia—Selected Issue (IMF
Country Report No. 08/298) developed thresholds of reserve adequacy based on standard metrics and found
these to be higher for Indonesia than traditional benchmarks. However, based on alternative metrics, Indonesia
was found to have below optimal reserves.
IND
IDN MYS
PHP
THA
BRA
MEX
ZAF
TUR
POL
RUS
BGR
CHLCOL
HRV
EGY
EST
HUN
LVA
LTU
PER
10
20
30
40
50
60
70
80
90
100
110
0 50 100 150 200
FX
Reserv
es/M
2
FX reserves/ total external debt
Reserves Adequacy, 2009(In percent)
34
Staff analysis indicates that periods of capital inflows coupled with reserve
accumulation and excess liquidity may contribute to asset boom/bust cycles.3 So far,
inflows into Indonesia have come primarily through portfolio flows rather than the banking
sector and are not directly contributing to credit growth. However, valuation levels in the
equity market have risen sharply, which though having little impact on the wider economy,
could be a harbinger of building asset price pressures.
Going forward, any mix of policy measures to deal with continued inflows involves
trade offs (Table I.1). Policy measures
taken in the region to deal with capital
inflows have focused primarily on
macroprudential measures to reign in
credit growth, particularly to real estate.
These types of measures may be less
relevant for Indonesia given relatively
subdued credit growth. A tax on inflows,
such as imposed by Brazil last fall, or even
an outright ban on foreign purchases of
SBIs would be administratively
cumbersome.4 In addition, such measures
could be counter to the goals of deepening the fixed income market and lowering the cost of
local currency borrowing, should foreign investor interest in longer term government
securities be deterred.
3 ―Lessons from Past Episodes of Large Capital Inflows in Asia,‖ Box 1.4, Asia and Pacific Regional Economic
Outlook, April 2010.
4Indonesia has a reporting regime in place for foreign ownership of fixed income investments, which is
administered through onshore custodians. Reporting requirements were strengthened effective January 1, 2010
such that nonresident investors are required to periodically supply verified documentation to be granted the
lower withholding tax specified under double taxation treaty agreements.
0
2
4
6
8
10
12
14
16
18
0
10
20
30
40
50
60
Jan-00 Mar-01 May-02 Jul-03 Sep-04 Nov-05 Jan-07 Mar-08 May-09
Market capitalization/annual GDP (in percent)
12-month forward P/E ratio (right scale)
Indonesia: Stock Market Indicators
35
Recent Country Examples Specific Operational
Policy Tool (2006–2010) Pros Cons Considerations
Foreign exchange intervention Many: China, Thailand, Taiw an POC,
Malaysia, Philippines, Russia,
Turkey etc.
Indonesia has some scope to
expand reserve cushion.
Sterilization costs on erode central
bank capital. Limiting rupiah
appreciation could cause build up of
bubble /one-w ay bet. Less
appreciation w ould push forw ard
need for monetary tightening.
Monetary easing Russia, Turkey, Poland, Czech
Republic, Hungary, Serbia 1/
Low ering rates w ould decrease
OMO costs.
May erode credibility and raise LT
borrow ing costs.
Fiscal tightening Low er domestic issuance might
low er onshore interest rates.
Limited room for any f iscal
tightening. Interest rate response
uncertain.
Restrictions on mortgage lending Hong Kong SAR: mortgages for
luxury property capped at 60
percent LVR. Max. loan amt for non-
luxury property capped at US$1.5
billion, stamp duty on sales
increased. Guidance on mortgage
rates. Korea: ceiling on LTV ratios
increased in Seoul. Singapore:
Interest-only loans banned. China:
Taxes on resale of properties w ithin
f ive years increased.
Maybe not so relevant for
Indonesia. Affects only real estate
transactions.
Higher reserve requirement on FX
liabilities than on local currency
liabilities
Many countries.Thailand
(2006–2008), Croatia: An effective
unremunerated reserve requirement
of 55 percent applied until 2009 to
increases in banks’ foreign liabilities.
Romania: Reserve requirements
ratios differ according to the
currency and residual maturity.
Prudential measures are not capital
controls, hence their implementation
does not result in negative investor
sentiment.
Inflow s to Indonesia are through
portfolio investment rather than
banks. May lead to disinternediation
via direct offshore borrow ing by the
nonfinancial private sector or
through institutions not subject to
reserve requirements.
Does not require additional
administrative resources, the
requirement can be administered
w ith the existing framew ork for
reserve requirements.
Limits to direct and indirect FX
exposure
Korea (2010): caps FX forw ard
positions of banks relative to their
equity capital. Restricts corporate
FX hedging to 100% of export
reciepts. Romania: The provisioning
costs for foreign exchange credits
to unhedged borrow ers are higher
than for local currency lending.
Prudential measures are not capital
controls, hence their implementation
does not alw ays involve negative
investor sentiment.
Indonesia already has FX NOP limits
of 20 percent of regulatory capital,
and banks maintain even smaller
ratios. Inflow s are now through
portfolio investment rather than
banks. FX loans have fallen to
15–16 percent of total loans. May
lead to disinternediation.
Does not require additional
administrative resources, the
requirement can be administered
w ith the existing framew ork for
reserve requirements.
Liberalization of controls on
residents' outw ard investments
Thailand ended restrictions on the
amount and f irms are permitted to
invest abroad and raised outw ard
foreign investment limit for mutual
funds. China canceled the review
and approval requirement for
outw ard direct investment.
View ed as improving the investment
environment.
Preconditions for liberalization must
be in place. For example,
liberalization of the controls on
Indonesian institutional investors'
investments abroad requires that
prudential ratios for exchange rate
risk management are in place.
Tax on portfolio inflow s Brazil (2 percent tax on portfolio
inflow s imposed in October 2009
may have slow ed inflow s
modestly), currently discussed by
Russia. Thailand (2006).
Some studies show that these
types of controls might serve to
lengthen maturity of inflow s
modestly, but such effects may be
due to misreporting of inflow s. 2/
Could reverse positive sentiment
and raise local currency borrow ing
costs. Could create market
dislocations or misreporting as
investors attempt to go around
regulations.
Requires effective tax collection
system and imposes additional
burden on the f inancial institutions
intermediating the portfolio
transactions, since they have to
assist in administering the control.
Rate of tax should be carefully
calibrated to avoid a collapse of the
stock exchange. May be
circumvented if not broad based.
Ban on foreigners buying central
bank bills
Iceland currently Affects only a relatively minor
segment of investments.
Creating a w edge betw een SBI's
and SUN's might further impede
deepening of yield curve.
Relatively easy to administer, but
additional provisions are needed to
minimize circumvention.
Minimum maturity requirements for
certain types of inflow s
Thailand, Colombia Distorts investment decisions,
destroys secondary market liquidity,
may raise cost of borrow ing.
Administratively cumbersome. Requires cooperation of the
securities depository, banks and
security brokers.
Other bans on foreign access Taiw an POC: Financial Supervisory
Commission barred access to time
deposit accounts for foreign
investors.
Local banks need to participate in
the administration of the control.
Compliance needs to be monitored
Sources: IMF, Spring 2010, Asia and Pacific Regional Economic Outlook; and IMF, Spring 2010 Global Financial Stability Report, Chapter 4.
C. Administrative
Table I.1. Measures to Manage Capital Flow Volatility
A. Macro
B. Macroprudential
36
APPENDIX II: INDONESIA—PUBLIC AND EXTERNAL DEBT SUSTAINABILITY
IN THE BASELINE SCENARIO
A. Public Debt
1. Public sector debt is low and declining despite the global shock in 2009. The ratio
fell to a record-low level of 29 percent in 2009 (Figure II.1) owing to prudent fiscal
management, which led to primary fiscal surpluses averaging almost 1.6 percent of GDP per
year in the last decade and a modest fiscal stimulus in response to the global shock in 2009.
Reduced inflation, lower interest rates, and high real GDP growth also contributed to debt
consolidation. Foreign-currency debt (mostly due to multilateral institutions) has fallen
markedly to less than half of total debt, as the improved fiscal position facilitated government
access to the domestic capital market.
2. The baseline scenario projects a further moderate decline in public sector debt.
Despite a larger fiscal deficit, public debt is likely to fall to about 27 percent of GDP in 2010,
reflecting rupiah appreciation and robust economic growth. In the medium term, gradual
fiscal consolidation—starting in 2011, based on subsidy reduction and tax administration
reforms and continued strong economic growth—will support a further decline in public debt
to 23 percent of GDP by 2015. Such a strategy will ensure a primary balance near zero, but
also accommodate extra resources for development spending.
3. Public debt is sustainable and robust to macroeconomic and oil price shocks. All
the standard stress tests suggest that the debt ratio is likely to remain modest even under
shocks from contingent liabilities, sharp exchange rate movements, and higher interest rates
(Figure II.1). Fiscal contingent liabilities
amounting to 10 percent of GDP could
raise the public sector debt to 32 percent
of GDP by 2015, while currency
depreciation of 30 percent would raise the
debt ratio to about 29 percent of GDP. An
increase in real interest rates would have a
smaller, but still sizeable, effect with the
debt ratio reaching 26 percent by 2015.
Other macroeconomic shocks have even
more limited impact. Furthermore,
stochastic simulations show that the maximum likely debt level under macroeconomic and
oil price shocks is also relatively moderate at about 35 percent of GDP in the 95 percent
confidence interval.
0
5
10
15
20
25
30
35
40
2009 2010 2011 2012 2013 2014 2015
Indonesia: Public Debt-to-GDP Ratio
95 percent confidence interval Baseline
Source: IMF staff calculations.
37
B. External Debt
4. Indonesia’s external debt continues on a steady downward trend, after a
temporary spike in 2009. Following a decade of a continuously improving external position,
the sharp nominal depreciation of late 2008 and early 2009 temporarily led to an increase in
the external debt-to-GDP ratio from 30 percent to 32 percent. However, strong growth and
the rapid turnaround in the exchange rate are quickly reversing this increase, with the ratio
projected to reach 27 percent of GDP as early as end 2010 (Figure II.2).
5. The baseline scenario projects external debt to continue on a declining path over
the medium-term, reaching 20 percent of GDP by 2015. A weakening current account
balance—projected to reach -1 percent of GDP by 2015—is expected to be more than offset
by: (i) sustained high real GDP growth in the range of 6.5−7.0 percent per year;
(ii) increasing non-debt creating (i.e., FDI) flows; and (iii) some further real appreciation. At
-0.4 percent of GDP, the medium-term non-interest current account balance would remain
comfortably above the debt-stabilizing level (−2.5 percent of GDP).
6. External sustainability is robust to most shocks. The external debt ratio is expected
to follow a declining path, and remain at manageable levels, under all standardized-shock
scenarios. A one-time 30 percent real exchange rate depreciation would have the largest
impact, raising the debt ratio by 14 percentage points in 2011, and 11 percentage points over
the baseline by 2015.
38
Sources: International Monetary Fund, country desk data, and staff estimates.
2/ Permanent 1/4 standard deviation shocks applied to real interest rate, grow th rate, and primary balance.
3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2009, w ith real depreciation
defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP
deflator).
Figure II.1. Indonesia: Public Debt Sustainability: Bound Tests 1/
(Public debt in percent of GDP)
1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes
represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average
for the variable is also show n.
Historical10
Baseline23
1
2
3
4
5
6
7
8
9
0
10
20
30
40
50
60
2005 2007 2009 2011 2013 2015
Baseline and Historical Scenarios
Gross financing need under baseline
(right scale)
Baseline
26
0
10
20
30
40
50
60
2005 2007 2009 2011 2013
Interest Rate Shock (in percent)
Baseline: 2.0Scenario: 4.1
Historical: -6.1
25
Baseline
23
0
10
20
30
40
50
60
2005 2007 2009 2011 2013 2015
Growth Shock (in percent per year)
Growth shock
Baseline: 6.6Scenario: 6.2
Historical: 5.2
24Baseline
23
25
0
10
20
30
40
50
60
2005 2007 2009 2011 2013 2015
PB shock
Primary Balance Shock (in percent of GDP) and
No Policy Change Scenario (constant primary balance)
Baseline: -0.1Scenario: -0.5
Historical: 1.6No policy change
26
Baseline23
0
10
20
30
40
50
60
2005 2007 2009 2011 2013 2015
Combined Shock 2/
Combined shock
29Baseline
23
Contingent liabilities
shock
32
0
10
20
30
40
50
60
2005 2007 2009 2011 2013 2015
Real Depreciation and Contingent Liabilities Shocks 3/
30% depreciation
3
9
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Debt-stabilizing
primary balance 9/
1 Baseline: Public sector debt 1/ 55.8 46.3 39.0 35.1 33.2 28.6 27.0 26.3 25.5 24.7 24.0 23.3 -0.7
Of which : foreign-currency denominated 28.7 24.0 18.2 16.5 17.1 13.3 12.3 11.6 10.8 9.8 9.0 8.2
2 Change in public sector debt -4.7 -9.5 -7.4 -3.9 -1.9 -4.6 -1.6 -0.6 -0.9 -0.8 -0.7 -0.7
3 Identified debt-creating flows (4+7+12) -4.8 -7.7 -8.8 -4.1 -4.8 -4.2 -0.7 -1.1 -1.0 -0.9 -0.8 -0.7
4 Primary deficit -1.3 -2.1 -1.6 -0.8 -1.7 -0.1 0.2 0.1 0.1 0.0 0.0 0.1
5 Revenue and grants 17.8 17.9 18.9 17.9 19.8 15.5 15.1 15.3 15.5 15.7 15.9 16.2
6 Primary (noninterest) expenditure 16.4 15.7 17.4 17.1 18.1 15.4 15.4 15.4 15.5 15.7 15.9 16.3
7 Automatic debt dynamics 2/ -2.0 -5.7 -7.2 -3.3 -3.1 -4.4 -1.4 -1.3 -1.3 -1.0 -0.9 -0.9
8 Contribution from interest rate/growth differential 3/ -4.7 -7.2 -5.5 -4.0 -5.3 -2.2 -1.4 -1.3 -1.3 -1.0 -0.9 -0.9
9 Of which : contribution from real interest rate -2.1 -4.6 -3.4 -1.9 -3.6 -0.9 0.1 0.2 0.3 0.5 0.6 0.6
10 Of which : contribution from real GDP growth -2.7 -2.6 -2.1 -2.1 -1.7 -1.3 -1.5 -1.5 -1.5 -1.5 -1.6 -1.5
11 Contribution from exchange rate depreciation 4/ 2.8 1.4 -1.8 0.7 2.2 -2.2 ... ... ... ... ... ...
12 Other identified debt-creating flows -1.5 0.2 0.0 0.0 0.0 0.3 0.4 0.2 0.2 0.1 0.2 0.2
13 Privatization receipts (negative) -1.5 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
14 Recognition of implicit or contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
15 Other (specify, e.g., bank recapitalization) 0.0 0.2 0.1 0.1 0.1 0.3 0.4 0.2 0.2 0.1 0.2 0.2
16 Residual, including asset changes (2–3) 5/ 0.1 -1.8 1.4 0.1 2.9 -0.4 -0.9 0.4 0.2 0.1 0.1 0.0
Public sector debt-to-revenue ratio 1/ 314.3 259.5 205.8 196.2 167.6 184.6 178.2 172.1 164.7 157.3 150.8 143.8
Gross financing need 6/ 3.4 1.7 2.5 2.7 1.3 3.5 3.1 3.2 3.1 3.1 2.9 2.7
In billions of U.S. dollars 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Scenario with key variables at their historical averages 7/ 27.0 22.9 19.3 15.9 12.8 10.0 -0.9
Scenario with no policy change (constant primary balance) in 2009–2014 27.0 26.7 26.0 25.5 25.0 24.4 -0.8
Key macroeconomic and fiscal assumptions underlying baseline
Real GDP growth (in percent) 5.0 5.7 5.5 6.3 6.1 4.6 6.0 6.2 6.5 6.7 7.0 7.0
Average nominal interest rate on public debt (in percent) 8/ 5.1 5.3 6.1 6.1 6.4 5.7 6.4 6.8 6.7 7.2 7.2 6.7
Average real interest rate (nominal rate minus change in GDP deflator, in percent) -3.4 -9.1 -7.9 -5.2 -11.9 -2.7 0.8 1.1 1.4 2.6 3.0 3.0
Nominal appreciation (increase in U.S. dollar value of local currency, in percent) -9.3 -5.5 9.3 -4.3 -13.8 16.1 ... ... ... ... ... ...
Inflation rate (GDP deflator, in percent) 8.6 14.3 14.1 11.3 18.3 8.4 5.7 5.7 5.2 4.5 4.2 3.8
Growth of real primary spending (deflated by GDP deflator, in percent) 14.2 1.2 16.6 4.3 12.6 -11.2 5.9 6.1 7.5 7.9 8.7 9.5
Primary deficit -1.3 -2.1 -1.6 -0.8 -1.7 -0.1 0.2 0.1 0.1 0.0 0.0 0.1
1/ Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used.
3/ The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g.
4/ The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).
5/ For projections, this line includes exchange rate changes.
6/ Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.
7/ The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.
8/ Derived as nominal interest expenditure divided by previous period debt stock.
9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.
2/ Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt;
and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).
Actual
Table II.1. Indonesia: Public Sector Debt Sustainability Framework, 2004–2014
(In percent of GDP, unless otherwise indicated)
Projections
40
Sources: International Monetary Fund; Country desk data; and staff estimates.
2/ Permanent 1/4 standard deviation shocks applied to real interest rate, grow th rate, and current account balance.
3/ One-time real depreciation of 30 percent occurs in 2009.
Figure II.2. Indonesia: External Debt Sustainability: Bound Tests 1/
(External debt, in percent of GDP)
1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes
represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical
average for the variable is also show n.
Historical
-1
Baseline
20
-5
0
5
10
15
20
25
-5
5
15
25
35
45
55
2005 2007 2009 2011 2013 2015
Baseline and Historical Scenarios
Gross financing need under baseline
21Baseline
20
15
20
25
30
35
40
45
50
55
2005 2007 2009 2011 2013 2015
Interest Rate Shock (in percent)
i-rate shock
Baseline: 3.5Scenario: 4.0
Historical: 3.5
Growth shock
21Baseline
20
15
20
25
30
35
40
45
50
55
2005 2007 2009 2011 2013 2015
Growth Shock (in percent per year)
Baseline: 5.3Scenario: 4.5
CA shock 27
Baseline
20
15
20
25
30
35
40
45
50
55
2005 2007 2009 2011 2013 2015
Noninterest Current Account Shock(In percent of GDP)
Baseline: 0.1Scenario: -1.4
Historical: 4.9
Combined shock
24
Baseline 20
15
20
25
30
35
40
45
50
55
2005 2007 2009 2011 2013 2015
Combined Shock 2/
31
Baseline20
15
20
25
30
35
40
45
50
55
2005 2007 2009 2011 2013 2015
Real Depreciation Shock 3/
30%
4
1
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Debt-stabilizing noninterest
current account 6/
1 Baseline: External debt 46.5 35.8 32.0 30.3 32.0 27.3 25.7 24.3 22.9 21.6 20.4 -2.5
2 Change in external debt -6.9 -10.6 -3.9 -1.7 1.7 -4.8 -1.6 -1.4 -1.4 -1.3 -1.2
3 Identified external debt-creating flows (4+8+9) -7.1 -14.0 -9.5 -5.7 -4.1 -2.9 -2.5 -2.0 -1.6 -1.6 -1.5
4 Current account deficit, excluding interest payments -1.8 -4.3 -3.5 -0.9 -2.7 -1.4 -0.6 -0.1 0.2 0.3 0.4
5 Deficit in balance of goods and services -2.9 -5.4 -51.9 -52.0 -41.7 -40.2 -38.0 -35.9 -34.4 -33.2 -31.9
6 Exports 35.0 31.6 30.2 30.3 24.7 23.4 22.1 21.0 20.1 19.4 18.6
7 Imports 32.0 26.1 -21.7 -21.8 -17.0 -16.8 -15.8 -15.0 -14.3 -13.9 -13.3
8 Net nondebt creating capital inflows (negative) -1.6 -1.0 -1.5 -0.7 -0.5 -0.6 -1.0 -1.1 -1.1 -1.1 -1.2
9 Automatic debt dynamics 1/ -3.7 -8.7 -4.6 -4.1 -0.8 -0.9 -1.0 -0.9 -0.8 -0.8 -0.7
10 Contribution from nominal interest rate 1.7 1.3 1.0 0.9 0.8 0.6 0.6 0.6 0.7 0.7 0.7
11 Contribution from real GDP growth -2.7 -2.0 -1.9 -1.6 -1.3 -1.5 -1.5 -1.5 -1.5 -1.4 -1.4
12 Contribution from price and exchange rate changes 2/ -2.7 -8.0 -3.7 -3.3 -0.3 ... ... ... ... ... ...
13 Residual, including change in gross foreign assets (2–3) 3/ 0.1 3.4 5.7 4.0 5.8 -1.8 1.0 0.6 0.2 0.3 0.3
External debt-to-exports ratio (in percent) 133.0 113.5 105.9 100.1 129.7 116.6 116.1 115.9 114.1 111.6 110.0
Gross external financing need (in billions of U.S. dollars) 4/ 26.7 32.8 33.6 59.1 47.2 54.0 66.5 78.4 88.8 99.0 109.0
In percent of GDP 9.3 9.0 7.8 11.6 8.8 7.8 8.7 9.3 9.6 9.7 9.6
Scenario with key variables at their historical averages 5/ 27.3 21.4 15.5 9.7 4.3 -0.6 -0.9
Key macroeconomic assumptions underlying baseline
Real GDP growth (in percent) 5.7 5.5 6.3 6.0 4.5 6.0 6.2 6.5 6.7 7.0 7.0
GDP deflator in U.S. dollars (change in percent) 5.2 20.8 11.6 11.6 0.9 20.5 4.1 3.5 3.4 3.5 3.4
Nominal external interest rate (in percent) 3.5 3.7 3.4 3.2 2.6 2.3 2.2 2.6 3.2 3.4 3.3
Growth of exports (U.S. dollar terms, in percent) 20.7 15.1 13.4 18.7 -14.0 20.8 4.6 4.4 5.7 6.8 6.0
Growth of imports (U.S. dollar terms, in percent) 28.0 4.1 -198.3 18.9 -17.7 26.3 4.2 4.1 5.7 7.1 6.3
Current account balance, excluding interest payments 1.8 4.3 3.5 0.9 2.7 1.4 0.6 0.1 -0.2 -0.3 -0.4
Net non-debt creating capital inflows 1.6 1.0 1.5 0.7 0.5 0.6 1.0 1.1 1.1 1.1 1.2
3/ For projection, line includes the impact of price and exchange rate changes.
4/ Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.
5/ The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.
Table II.2. Indonesia: External Debt Sustainability Framework, 2004–14
(In percent of GDP, unless otherwise indicated)
2/ The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic
currency (e > 0) and rising inflation (based on GDP deflator).
6/ Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent
of GDP) remain at their levels of the last projection year.
Actual
1/ Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in U.S.
dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external
Projections
INTERNATIONAL MONETARY FUND
INDONESIA
Staff Report for the 2010 Article IV Consultation—Informational Annex
Prepared by the Asia and Pacific Department
August 2, 2010
Contents Page
I. Fund Relations................................................................................................................. 2
II. Relations with the World Bank Group ............................................................................. 3
III. Relations with the Asian Development Bank ................................................................... 7
IV. Statistical Issues .............................................................................................................. 9
2
ANNEX I: INDONESIA—FUND RELATIONS
(As of June 30, 2010)
I. Membership Status: Joined February 21, 1967; Article VIII
II. General Resources Account SDR Millions Percent of Quota
Quota 2,079.30 100.00
Fund holdings of currency 1,933.80 93.00
Reserve position in Fund 145.50 7.00
III. SDR Department SDR Millions Percent of
Allocation
Net cumulative allocation 1,980.44 100.00
Holdings 1,762.40 88.99
IV. Outstanding Purchases and Loans None
V. Financial Arrangements
Type
Approval Date
Expiration
Date
Amount
Approved
(SDR millions)
Amount Drawn
(SDR millions)
EFF 2/04/2000 12/31/2003 3,638.00 3,638.00
EFF 8/25/1998 2/04/2000 5,383.10 3,797.70
Stand-by 11/05/1997 8/25/1998 8,338.24 3,669.12
VI. Projected Payments to Fund (expectations basis)
(SDR millions; based on existing use of resources and present holdings of SDRs):
Forthcoming
2010 2011 2012 2013 2014
Principal
Charges/Interest 0.29 0.60 0.61 0.60 0.60
Total 0.29 0.60 0.61 0.60 0.60
VII. Exchange Arrangements
The rupiah has floated since August 14, 1997. The market exchange rate was Rp 9,053 per
U.S. dollar on June 30, 2010. Indonesia has accepted the obligations of Article VIII,
Sections 2, 3, and 4, and maintains an exchange system free of restrictions on payments and
transfers for current international transactions.
VIII. Article IV Consultation
The last Article IV consultation report (IMF Country Report No. 09/230) was discussed by
the Executive Board on July 13, 2009.
3
ANNEX II: INDONESIA—RELATIONS WITH THE WORLD BANK GROUP1
(As of June 9, 2010)
Indonesia Country Partnership Strategy
The World Bank Group’s (WBG) Country Partnership Strategy (CPS) for Indonesia
for FY 2009−12, which marked Indonesia’s emergence as a strong middle income country,
was approved by the WBG Board in September 2008. The CPS focuses on improving
Indonesia’s institutions, both at the central and sub-national level, through five core areas of
engagement: private sector development, infrastructure, community development, education,
environmental sustainability, and disaster mitigation. A full Progress Report on the CPS will
be undertaken in FY 11.
The CPS implementation is marked by strong dialogue and solid partnership with the
Indonesia’s core economic ministries and several line ministries and agencies, including
education, public works, people’s welfare, anti-corruption commission (KPK), supreme and
state audit agencies (BPK and BPKP), and regional/local governments. Partnerships with the
key bilateral and multilaterals, including EC, Japan, Australia, Netherlands, ADB, UNDP
and IMF remain robust.
World Bank Engagement: Selected Highlights
Improving the Climate for High Quality Investment and Growth. The WBG, with the
support of trust funds, is involved in several key areas to promote the private sector. The
WBG works closely with the government to develop investment policies that are conducive
to private sector business including regulatory reform and business licensing. In addition to
improving the investment climate, the WBG is also involved in creating a better trade
environment—both domestically and internationally. On the domestic side, work on logistics
has become a top priority for improving Indonesia’s connectivity and competitiveness. On
the international side, the WBG team is working on implementation of the National Single
Window, analysis of non-tariff barriers, and port and customs bottlenecks. On the finance
side, the WBG is also involved in improving access to financial services, infrastructure
financing, and developing non-bank financial institutions.
In response to the global financial crisis, the Government of Indonesia (GOI) took
precautionary and preemptive actions to address financial and fiscal concerns including
approaching the WBG and other development partners for contingent financing support. The
WBG assisted the Government to mobilize from bilateral, multilateral and other sources
US$5.5 billion, of which US$2 billion was a WBG-supported Development Policy Loan with
1 Prepared by the World Bank staff. For questions relating to this annex, contact Shubham Chaudhuri
at (+62 21) 5299 3076 or [email protected].
4
a Deferred Drawdown Option (DPL-DDO), enabling Indonesia to successfully weather the
crisis and emerge as one of the more robust economies in the region.
Strengthening the Governance Agenda. The WBG is supporting the strengthening of
Indonesia’s country systems. The fight against corruption is central to the Government’s
program and relevant institutions continue to be strengthened. The CPS seeks to move away
from a WBG focused approach of ―ring-fencing projects‖ to one designed to strengthen and
build upon Indonesia’s own systems, policies and procedures. This approach focuses on
policy formulation, policy and program implementation, financial management, procurement,
budget implementation, audit, social and environmental safeguards, monitoring and
evaluation, and supports Indonesia’s priority budget programs to enhance the quality of
overall public spending. In addition, funding in several projects (e.g., PNPM, BOS and
DAK) puts more focus on utilizing and strengthening existing government programs, with
better monitoring and oversight of results. To strengthen governance, work is also expanding
in improving the effectiveness of the government via bureaucratic reform—first at the
Ministry of Finance, and more recently with the Ministry of Trade.
Deepening Indonesia’s Decentralization. The decentralization and empowerment of local
governments has been one of Indonesia’s most remarkable achievements in the past 10 years.
As a result, Indonesia’s almost 500 sub-national governments now manage close to
40 percent of all public spending. Many of elected heads of provinces and districts/cities are
implementing innovative reforms, although challenges are considerable. Needs, opportunities
and the WBG’s capacity to respond to the demand vary greatly across the archipelago. Over
the CPS period, the WBG will seek to engage with a limited number of sub-national
governments that demonstrate a clear commitment to reforms. One means is through our sub-
national public expenditure reviews, tailored to the needs of local governments. Another
project will increase the accountability of local governments in their use of Specific Purpose
Grants (DAK). DAK grants come from the national budget (APBN) and are generally used to
support regions that lack the fiscal capacity to provide physical infrastructure for basic public
service delivery. Lastly, the WBG-administered Decentralization Support Facility brings
together a number of development partners with a broad mandate to engage Indonesian
institutions essential to the local accountability framework.
Enhancing Poverty Reduction and Service Delivery. The GOI aims to lower the poverty
rate from 14.1 percent in 2009 to 8−10 percent by 2014 by strengthening economic growth
and job creation, as well as continuing its poverty reduction strategy. To this end, the WBG
is providing technical assistance to the government in coordinating and integrating poverty
reduction programs. Analytical and advisory services are supporting the reform of
household-based assistance programs, the establishment of cross-cutting targeting and M&E
systems, and the strengthening of local capacities for poverty analysis. Key reforms in these
areas are included among the triggers for a series of development program loans that also
support reforms in investment climate, public financial management, public service delivery
and infrastructure. In addition, WBG is supporting the implementation and consolidation of
5
community-based programs through the National Community Empowerment Program
(PNPM Mandiri) Support Facility. The WBG also supports the development of local water
utilities to improve delivery of water and sanitation services. On health, there has been recent
work on maternal health, HIV, and health insurance. On education, the WBG is involved in
improving the quality of teacher management, early childhood development, youth skills and
competitiveness.
Supporting Indonesia on Environmental Sustainability and Climate Change. Indonesia
emits significant levels of greenhouse gases, mainly from deforestation and land use change.
The GOI recognizes this issue and is developing an initiative on Reduced Emissions from
Deforestation and Degradation (REDD) supported by the WBG. The GOI is pursuing an
innovative and potentially path-breaking engagement with the WBG on geothermal energy.
The WBG is also deepening the relationships established with the National Planning Agency
(Bappenas) and the local governments of Aceh, Nias and Jogjakarta in supporting selected
elements of the Government’s actions to strengthen natural disaster resiliency. In addition to
investment operations, the WBG is supporting the GOI with background studies and other
analytical work and technical assistance provided to the Government agencies at the central
and local levels. The WBG has also supported GOI’s initiatives through the recent climate
change development policy loan.
Support for Sustainable Recovery in Disaster Areas. Reconstruction efforts after the
tsunami in Aceh and the series of earthquakes devastating Nias, Central Java, and Jogyakarta,
have become a key element of the WBG’s response program, anchored around two
substantial multi-donor trust funds. The Multi-Donor Fund (MDF) for Aceh and Nias brings
together some 15 partners and is providing nearly US$700 million in resources, while Java
Reconstruction Fund (JRF), supported by six partners, brings in over US$90 million.
Post˗disaster reconstruction and recovery are progressing well. In the wake of the recent
West Sumatra earthquake, the WBG took a leading role in the damage and loss assessment
and has an on-going program to train other institutions to conduct such assessments in the
future.
Bank Operations in FY 10 and FY 11
Lending. As of April 30, 2010, there are 46 active IBRD/IDA investment projects and
project-type grants in the Indonesia Portfolio, including a DPL with a Deferred Draw Down
Option (DDO). For FY 10, the World Bank expects to deliver 8 projects and 2 additional
financing operations, worth $3.2 billion. These include three development policy loans (DPL,
Infrastructure DPL, Climate Change DPL), and lending in rural and urban community
programs (PNPM), local government (DAK), urban water, health education quality, and
power transmission.
In FY 11−12, there is a strong pipeline of about $1.0 billion a year each for DPLs, country
programs and projects, including significant infrastructure investments. In addition to the
6
development policies series, other deliveries planned for FY 11 are projects to strengthen
statistical capacity of the Government, electric transmission, an infrastructure guarantee fund,
and road preservation.
Analytical and Advisory Services. In addition to the lending program, the WBG is
delivering to the Government of Indonesia policy notes and just-in-time advice, technical
assistance, as well as reports including Papua Infrastructure Strategy, Labor Report, Health
workforce, Agriculture Research and Development PER, Access to Finance for Migrant
Workers.
In the year ahead, the WBG expects to deliver continuing analytical and advisory support,
including policy notes for the new Government and reports including on Social Protection,
Public Spending, Urbanization and Maternal Health.
Trust Funds. Trust funds (TF) and grant financing are an integral part of the WBG program.
The Indonesian TF portfolio is around US$1 billion at present.
7
ANNEX III: INDONESIA—RELATIONS WITH THE ASIAN DEVELOPMENT BANK1
(As of June 9, 2010)
Asian Development Bank (ADB) cumulative loans to Indonesia reached $25.7 billion as of
end-December 2009. In 2009, the ADB approved a total of $2,184 million or 16.5 percent of
the total loans approved by the institution for the year. More than 90 percent of the loans
approved in 2009 were provided through four policy-based operations. Two loans supported
the Government’s efforts to mitigate the effects of the global economic crisis. The remaining
two continued to support the Government’s medium-term term reform agenda in capital
market development, investment climate, public financial management, and poverty
alleviation.
ADB is preparing a Country Partnership Strategy with the Government of Indonesia to cover
the period 2011−2015. The strategy will be aligned with the Government’s medium-term
development plan (RPJM) for 2010−2014. It will support the government’s objectives to
achieve higher levels of sustainable growth and to foster social development. It is anticipated
that assistance will be provided in the core areas—transport, energy, financial sector, natural
resource management, water supply and sanitation, and education—identified in ADB’s
Long-Term Strategic Framework. Support for good governance, gender equality,
environmental sustainability and regional cooperation will be encouraged in all sectors where
relevant. Special emphasis will be provided to assist the Government to implement its
Climate Change action plan.
Between 1967 and 2009, ADB provided 504 Technical Assistance grants to Indonesia
amounting to $282.9 million. The TA grants were financed from ADB’s Technical
Assistance Special Fund, the Japan Special Fund, and other sources. Measured by cumulative
TA approvals, Indonesia is the second largest recipient of TA support from the ADB.
Table 1. Sovereign and Nonsovereign Loan Approvals
and Disbursements to Indonesia
(In millions of U.S. dollars)
2004 2005 2006 2007 2008 2009
Loan approvals 225.0 1,145.69 784.8 1,187.1 1,085 2,184.2
Loan disbursement 593.5 1,014.99 1,025.88 1,136.3 949.6 739.3
Sources: Asian Development Bank, Annual Report (various editions), and ADB staff.
1 Prepared by ADB staff.
8
Table 2. Cumulative Lending to Indonesia
(As of December 31, 2009)
Sector Loans Amount
(No.) ($ million) Percent 1/
Agriculture and Natural Resources 99 4,047.00 15.74
Education 32 2,222.35 8.64
Energy 31 3,781.05 14. 71
Finance 20 3,526.10 13. 72
Health and Social Protection 13 1,068.30 4.16
Industry and Trade 12 645.70 2.51
Public Sector Management 16 4,167.22 16.21
Multisector 16 1,586.22 6.17
Transport and ICT 33 2,713.86 10.56
Water Supply and Other Municipal 31 1,949.74 7.58
Infrastructure and Services
Total 303 25,707.54 100.00
Sources: Asian Development Bank, Indonesia Fact Sheet 2010; and ADB staff.
1/ Total may not add up because of rounding.
9
ANNEX IV: INDONESIA—STATISTICAL ISSUES
As of June 22, 2010
I. Assessment of Data Adequacy for Surveillance
General: Indonesia’s macroeconomic statistics are broadly adequate to conduct effective surveillance.
National accounts: Quarterly GDP data are published in a timely manner for both expenditure and production
sides. The annual national accounts have 2000 as the base year. The estimates are based on a limited set of
indirect indicators of uncertain quality. Some sectors are influenced strongly by seasonality, and seasonally
adjusted data are prepared but not published. In addition, no survey of nonfinancial services is prepared. The
Fund has recommended: (i) development of a system to continuously update the census of businesses;
(ii) introduction of comprehensive annual establishment surveys for nonfinancial services industries;
(iii) publication of annual GDP estimates, including a time series of at least 20 years; (iv) development of a set of
annual supply and use tables (SUTS) starting from 2000; and (v) enhancing the convergence exercise on trade
data between Bank Indonesia (BI) and Ministry of Finance (MoF).
Price statistics: Price statistics are broadly adequate for surveillance.
Government finance statistics: Available government finance data suffer from a number of weaknesses, in
terms of classification, coverage, and timeliness. Data on the budget of the central government are available with
a one-month lag, but subnational (provincial and local) government data are available only with a lag of two
years, and the quality of this data is variable. Problems in budget and accounting systems have been
compounded by the recent decentralization initiatives, which have shifted substantial resources to the
subnational governments. Substantial efforts are in train, and significant progress has been made to overcome
these problems, ranging from the planned adoption of advanced accounting and statistical standards, to the
introduction of best practice budget management processes, and the development of computerized financial
management information systems.
Against this background, the MoF and the Ministry of Home Affairs are committed to keeping the requirements of
fiscal statistics at the forefront of ongoing fiscal reforms, so as to make better statistical monitoring one of the
goals of the current efforts. The coverage and timeliness of public debt statistics is generally adequate. The new
expenditure classification introduced in the 2005 budget, is generally consistent with the Government Finance
Statistics Manual 2001 (GFSM 2001) on functional codes and classification, although the data are compiled on a
cash basis.
The authorities have committed to adopting GFSM 2001 standards. To this end, the Fund staff has
recommended in the short term: (i) establishment of a register of all extrabudgetary units; and (ii) inclusion of the
economic codes consistent with the GFSM 2001 in the chart of accounts to ensure that general government units
report all transactions and balances over which they exert control. Over the medium-term, priority should be
given to (i) establish the underlying reporting arrangements necessary to obtain timely preliminary data for local
government statistics; and (ii) to develop GFSM 2001 operating statements, statements of sources and uses of
cash, and partial balance sheets, all of which should be published on the MoF websites. Currently a system has
been set up to allow for an automatic conversion of budget files to GFSM 2001 data; however, these data are yet
to be published on the MoF website.
10
Monetary statistics: Good quality monetary statistics are compiled by BI on a timely basis. With STA
assistance, BI has developed an integrated database from which alternative presentations of monetary statistics
can be drawn to meet the needs of BI and the Fund. To strengthen monetary statistics, STA missions have also
recommended the expansion of the coverage of monetary statistics to include mutual funds. Additional
challenges include timely revisions of published banking sector data after supervisory verification.
Balance of payments: Trade data are affected by some significant shortcomings. While customs sources
utilized by the BI are considered generally reliable, coverage of merchandise trade flows is insufficient. Also,
when the online reporting system for exports and imports was introduced in 2004, the historical series were
reconstructed only as far back as 2003. As a result, prior to 2003, balance of payments statistics are not entirely
consistent with the national accounts estimates. Exports and imports volume data, and consequently trade
deflator data, is incorrectly computed as aggregate indexes that do not weight sub-category volumes by their
economic value.
For the capital and financial account, the methodological basis for the compilation of FDI data needs substantial
improvement. Inflows are currently calculated based on loan disbursements to companies that have foreign
equity using a fixed ratio to estimate equity inflows. Surveys conducted by BI to collect FDI data have a low
response rate and the coverage of the directory of enterprises should be improved. Other areas that need
improvement include the recording of trade credits and the asset data for portfolio investment and other
investment transactions. The magnitude of the errors and omissions item has been significant at times and
appears to be related to the methodology used, for instance, for unrecorded assets in the financial account.
Financial transactions data have not been reconciled with changes in the International Investment Position (IIP).
An annual IIP is compiled, but the underlying data are weak in several areas, notably for FDI, and published data
should include a higher degree of disaggregation (only main items are reported). External debt statistics have
improved considerably with the introduction of an External Debt Information System (EDIS) in 2002 and the
recent initiative to publish monthly indicators. However, improvements are still needed with respect to
components of private corporate sector data, particularly in distinguishing between scheduled and actual debt
service, in estimating the accumulation/reduction of private sector payments arrears, and in estimating
rescheduling and debt reductions received by the private sector from external creditors.
II. Data Standards and Quality
Subscriber to the Special Data Dissemination
Standard (SDDS) since September 1996, observing
most of the SDDS requirements.
Data ROSC completed in 2005.
11
Indonesia: Table of Common Indicators Required for Surveillance
(As of June 30, 2010)
Date of
Latest
Observation
Date
Received
Frequency
of
Data6
Frequency
of
Reporting6
Frequency of
Publication6
Memorandum Items:
Data Quality –
Methodological
soundness7
Data Quality –
Accuracy and
Reliability8
Exchange rates 6/30/10 6/30/10 D D W/M
International reserve assets and
reserve liabilities of the monetary
authorities1
6/30/10
7/23/10
D M M
Reserve/base money 6/10 7/28/10 D D W/M O, LO, O, O LO, O, O, LO,
O Broad money 5/10 7/28/10 M M M
Central bank balance sheet 4/10 6/21/10 M M M
Consolidated balance sheet of the
banking system
5/20/10 6/8/10 M M M
Interest rates2
6/30/10 6/30/10 D D W/M
Consumer price index 6/10 7/10 M M M
Revenue, expenditure, balance and
composition of financing3–central
government
2010 6/21/10 M M Mid-year LNO, LNO, LO,
LNO
LNO, LO, LO,
LO, LNO
Stocks of central government and
central government–guaranteed debt
3/10 6/10 M Q A
External current account balance 3/10 5/24/10 Q Q Q LO, LO, LO, LO LO, O, LO, O,
O Exports and imports of goods and
services
3/10 7/13/10 M M M
GDP/GNP 3/10 7/13/10 Q Q Q LO, LO, O, LO LO, LO, LO,
LO, LNO
Gross external debt4
3/10 6/21/10 Q Q A
International investment position5 2008 5/24/10 A A A
1Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.
2 Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.
3 Foreign, domestic bank, and domestic nonbank financing.
4 Including currency and maturity composition.
5 Includes external gross financial assets and liability positions vis-à-vis non residents.
6 Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); NA: Not Available.
7 Reflects the assessment provided in the data ROSC published on July 20, 2005 (based on the findings of the mission that took place during
March 28-April 11, 2005), for the dataset corresponding to the variable in each row. The assessment indicates whether international standards
concerning concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O); largely observed (LO); largely
not observed (LNO); not observed (NO); and not available (NA). 8 Same as footnote 7, except referring to international standards concerning source data, assessment of source data, statistical techniques,
assessment and validation of intermediate data and statistical outputs, and
revision studies.
Statement by the IMF Staff Representative on Indonesia
August 27, 2010
The information below has become available following the issuance of the staff report. It does
not alter the thrust of the staff appraisal.
1. Economic recovery continued in Q2 of 2010 as indicated by the 6.2 percent annual real
GDP growth. While private consumption continues to drive economic growth, the contribution
from investment—including from rebounding FDI inflows—was significant. The recovery in
credit growth has continued with July numbers showing an increase of 19½ percent (y/y).
Despite continued export growth, the contribution of net exports declined somewhat with the
acceleration of investment-related imports, but remained positive. The balance of payments
surplus narrowed somewhat in Q2, primarily due to a slowdown in portfolio inflows driven by
global turbulence related to the European debt crisis, and a marginally weaker current account
amid strong imports. These developments are consistent with the projections for 2010 in the staff
report.
2. Staff revised the 2010 inflation outlook upward by a ¼ percentage point to 5 percent for
the annual average and 6 percent at year end—the upper end of Bank Indonesia’s (BI) target
range—reinforcing the case made in the staff report for the authorities to respond to inflationary
pressures to keep expectations within the target range. Inflation has been driven by persistent
increases in food prices, with annual headline inflation rising to 6¼ percent in July. Core
inflation also increased in July to near 4 percent. While earlier signaling that the holding stance
was consistent with the inflation target, BI’s August policy statement signaled some concern
over price pressures.
3. Market sentiment remains upbeat and strong capital inflows continue. During July and
August, the rupiah has been trading at about Rp 9,000 per U.S. dollar. Local government debt
yields have continued to fall despite the uptick in inflation. Net foreign purchases of
BI certificates (SBIs) kept pace with those of government notes at US$2 billion since the
beginning of July, indicating continued appetite for SBIs despite the one-month holding period
requirement announced on June 16.
4. The government revised down its estimate for the overall 2010 budget deficit to
1½ percent of GDP from 2 percent, largely reflecting higher projected revenue as well as slower
capital spending. The preliminary 2011 budget framework released on August 17 projects an
overall deficit of 1¾ percent of GDP, reflecting a planned increase in capital spending and
improved revenue collections (in line with staff projections).
Public Information Notice (PIN) No. 10/130 FOR IMMEDIATE RELEASE September 16, 2010
IMF Executive Board Concludes 2010 Article IV Consultation with Indonesia
On August 27, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Indonesia.1 Background Indonesia’s growth in 2009 was 4½ percent, the third highest in the G-20 group of countries, and the pace is accelerating in 2010. Several factors contributed to this resilience during the crisis, including strong initial conditions, which resulted from prudent macroeconomic management, greater dependence on domestic demand, a diversified export base, and appropriate policy responses to support domestic demand. High frequency indicators for both consumption and investment indicate strong growth momentum in 2010. Inflation decelerated to 2.8 percent in 2009 (year-on-year) but is increasing slightly in 2010. Capital flows into Indonesia have been buoyant, driven in part by ratings upgrades. Both push and pull factors have attracted large portfolio inflows, particularly into government bonds and short-term Bank Indonesia certificates (SBIs). While volatility increased in May following the European crisis, with about US$5.75 billion of capital outflows—mostly SBIs—inflows have since returned. Meanwhile, the stock market, the rupiah exchange rate, and the level of international reserves are at or above pre-crisis levels.
1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
International Monetary Fund 700 19th Street, NW Washington, D. C. 20431 USA
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Bank Indonesia (BI) has left the policy rate unchanged since September 2009. After easing the policy rate by 300 bps during the crisis, BI has left the rate at a historic low of 6½ percent. Meanwhile, to enhance its liquidity management, BI recently introduced a series of measures. In particular, to discourage the use of SBIs for short-term cash management, BI has been shifting the maturity structure of SBIs from one month to 3- and 6-months, and it plans to introduce 9- and 12-month bills later this year. In addition, to encourage interbank market development, BI widened its policy rate corridor by 100 basis points to 5.5 percent to 7.5 percent. A one-month holding period on SBIs across the board was also introduced to help reduce money market volatility. Fiscal support during the crisis was modest by international standards. Despite having room for undertaking countercyclical fiscal measures, owing to consistent prudent fiscal management in previous years, Indonesia’s fiscal stimulus was about 1.1 percent of GDP or half the average stimulus in the G-20 group. In fact, Indonesia had a primary surplus of 0.1 percent of GDP in 2009, and public debt declined to about 29 percent of GDP—the only country in the G-20 with declining debt in 2009. The financial and corporate sectors were resilient to the crisis. Banks maintained high capital adequacy ratios and remained profitable despite the difficult operating environment. Although gross nonperforming loans increased, the ratio of nonperforming loans to total loans remained low at 3.2 percent. Banking sector liquidity improved throughout the year. Credit growth was 10 percent in 2009 and is gaining momentum in 2010, with 19½ percent growth in the year to July. Corporate balance sheets were relatively more liquid than other Asian economies. Corporate bond issuance declined during the crisis, but large corporations have returned to local debt markets since mid-2009. The Article IV consultation also included discussions on the findings of the recently concluded joint IMF/World Bank Financial Sector Assessment Program (FSAP). Executive Board Assessment Executive Directors commended the Indonesian authorities for their impressive policy performance which successfully steered the economy through the global financial crisis. Its favorable public debt dynamics, sovereign ratings upgrades and higher global risk appetite provide an opportunity for Indonesia to sustain, and even accelerate, economic growth and development. Going forward, maintaining an appropriate policy mix is an important challenge in the current volatile external environment. Over the medium term, efforts should continue to improve public infrastructure and the business climate. Directors considered that maintaining exchange rate flexibility is an important part of the toolkit to manage the volatility of capital flows. They supported the introduction of a one-month holding period for Bank Indonesia (BI) certificates to help thwart short˗term volatility. Directors encouraged the authorities to address potential competitiveness pressures from further rupiah appreciation by removing supply constraints. To lower sterilization costs, Directors recommended the gradual conversion of the nonmarketable government bonds in BI’s balance sheet to marketable bonds, thereby also expanding BI’s operational toolkit.
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Directors considered BI’s current monetary policy stance to be appropriate given that core inflation is within the target range. Looking ahead, they advised that BI should signal its readiness to respond to rising inflationary pressures to anchor inflation expectations within the 4–6 percent target range. Continued effective communication of a proactive policy would also signal BI’s commitment to lower the level and volatility of inflation in line with trading partners. Directors generally cautioned against introducing administrative measures to fuel credit growth. Directors commended Indonesia’s progress over the last decade in improving financial stability. They welcomed the steps being taken by the authorities to further strengthen the resilience of the financial sector in line with the recommendations of the recent FSAP, including enactment of the Financial System Safety Net Law, introducing a prompt corrective action regime to deal with problem banks, and enforcement of creditors’ rights. Proper coordination of macro and micro prudential supervision and developing capital markets to diversify the funding base are also important. Directors endorsed the overall fiscal stance for 2010 and noted that further fiscal reforms will be necessary to support sustained high growth. Specifically, reducing energy subsidies would create additional fiscal space for much needed infrastructure spending and transfer programs for the poor, with little impact on debt sustainability. They stressed the importance of better budget execution for strengthening fiscal policy effectiveness and of efforts to expand the tax base and raise revenue ratios.
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2010 Article IV Consultation with Indonesia is also available.
Indonesia: Selected Economic Indicators, 2007–11
2007 2008 2009 2010 2011Proj.1/
Real GDP (percent change) 6.3 6.1 4.5 6.0 6.2Private consumption 5.0 5.3 4.9 5.3 5.5Gross fixed investment 9.4 11.9 3.3 7.9 8.2Net exports 2/ 0.6 0.7 1.2 0.5 0.6
Saving and investment (in percent of GDP) Gross investment 3/ 25.0 27.7 31.1 31.9 32.6Gross national saving 27.4 27.7 33.0 32.8 32.7
Prices (12-month percent change) Consumer prices (end period) 5.6 11.1 2.8 5.9 5.8
Public finances (in percent of GDP) 4/ Central government revenue 17.9 19.8 15.1 15.4 15.4Central government expenditure 19.1 19.9 16.7 16.8 17.2Central government balance -1.2 -0.1 -1.6 -1.5 -1.7Primary balance 0.8 1.7 0.1 0.1 -0.1Central government debt 36.9 33.2 28.6 26.7 26.3
Money and credit (12-month percent change; end of period) Rupiah M2 19.5 12.6 13.9 ... ...Total credit 27.5 30.8 10.1 ... ...One-month SBI rate (period average) 8.6 9.1 7.4 ... ...
Balance of payments (in billions of U.S. dollars) Non-oil exports (f.o.b) 93.1 107.9 99.1 123.3 129.2Non-oil imports (f.o.b) -66.1 -92.8 -72.2 -94.7 -103.7Current account balance 10.5 0.1 10.6 6.4 0.5Overall balance 12.7 -1.9 12.4 16.4 7.5
Gross reserves In billions of U.S. dollars (end period) 54.1 52.1 66.1 82.5 90.0In months of imports 4.5 5.6 5.5 6.3 6.3As a percent of short-term debt 5/ 157.4 141.5 203.7 226.4 223.5
Total external debt In billions of U.S. dollars 137.4 149.7 172.8 187.7 195.5In percent of GDP 31.8 29.3 32.0 27.0 25.2
Exchange rate (period average) Rupiah per U.S. dollar 9,141 9,439 10,354 ... ...Nominal effective exchange rate (Jan. 2000=100) 80.9 73.6 69.7 ... ...
Memorandum items: Nominal GDP (in trillions of rupiah) 3,957 4,954 5,613 6,311 7,071
Sources: Data provided by the Indonesian authorities; and IMF staff estimates.
1/ Projections reflect data available since the issuance of the staff report. 2/ Contribution to GDP growth (percentage points). 3/ Includes changes in stocks. 4/ 2009 data have been revised to reflect the audited 2009 budget. 5/ Short-term debt on a remaining maturity basis.
Statement by Duangmanee Vongpradhip, Executive Director for Indonesia
and Dicky Kartikoyono, Senior Advisor to Executive Director
Introduction
1. The Indonesian authorities would like to thank the IMF and the World Bank team for fruitful
and candid dialogue during this year’s Article IV consultation and the first joint IMF/World
Bank’s FSAP. The authorities broadly agree with their appraisal of the Indonesian economy
and continue to value their constructive policy recommendations. They would also like to
communicate their appreciation to the Fund’s management, particularly Deputy Managing
Director, Mr. Shinohara, for his visit to Indonesia that coincided with the end of this year’s
mission. During the occasion, he shared his strategic and valuable views with the authorities
on the issues of recent global economic development, the outlook of Asian economy, and
ongoing reforms of the Fund. The authorities welcomed and commended the Fund’s sensible
initiative to enhance its useful engagement to its members in the region, including Indonesia.
Recent Economic Development
2. Despite the challenging external environment, the Indonesian authorities have persevered
with prudent macroeconomic and financial policies, as well as intensified structural reforms
to further unlock its growth potential. Their earlier economic programs aimed at maintaining
fiscal sustainability and safeguarding monetary and financial stability have been able to
deliver a remarkable outcome. Considerable debt reduction, rising investment, marked fiscal
primary surplus, subdued inflation, less volatile exchange rates, a stronger banking system
and healthy corporate balance sheets were amongst the indicators marking Indonesia’s
resilience to withstand the economy from the lingering impact of global economic crisis and
uncertainty in the global financial market. Such achievements have been able to buttress
strong prevailing domestic demand during the crisis, which led Indonesia to register a fairly
high growth reaching 4.5 percent in 2009. With acceleration in investment and a strong
recovery of exports, this growth momentum would be accelerated in 2010 and 2011 to reach
around 6.0 percent and 6.5 percent, respectively.
3. In the aftermath of the crisis, Bank Indonesia (BI), the central bank, adopted a loose
monetary stance by cutting aggressively its BI rate, the policy rate, as well as extending
liquidity to the banking system so as to provide monetary stimulus aimed at preventing
further decline in economic growth. On account of decreasing commodity prices, favorable
domestic supply conditions and weak monetary growth, average inflation during 2009
declined significantly to a historical low of 2.8 percent (y/y).
4. Into 2010, food prices have started to be volatile and shown unexpectedly strong growth
lifting the headline rate in July to 6.2 percent (y/y), while inflationary pressure from
fundamentals, reflected in core inflation, has held at a modest 4.2 percent (y/y). In response
to renewed inflationary pressures, since September 2009 Bank Indonesia (BI), the central
bank, decided to keep its policy rate steady at 6.5 percent. It viewed that the earlier easing
stance to combat the crisis could not be continued. While observing that this interest rate
level is adequate to anchor inflation expectations, consistent with the inflation target of
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5−6 percent in 2010 and allowing room for financing activities to further expand and boost
economic growth, they have noted there was some uncertainty on the path of inflationary
developments in the months ahead. In their last monetary policy statement on
August 4, 2010, BI’s Board of Governors continued to believe that Indonesia hitherto did not
have a strong case to raise the policy rate, as the inflation outlook remains benign.
Nonetheless, they have also indicated that they are standing ready to reverse the policy
direction as needed to maintain inflation within the target range.
5. While private consumption maintains brisk growth in 2009 and 2010, exports have mounted
steadily on the performance of manufacturing industries. The recovery in the world economy
and commodity prices is also in support of continued growth in Indonesia’s exports. Driven
by vibrant dynamics of regional economies, up until June 2010 the current account posted
staggeringly a surplus with exports surpassing imports. Following the ongoing improvement
in domestic economic performance and outlook, large capital inflows and some return of
foreign direct investment will continue to bring positive impact on Indonesia’s balance of
payments. In Q2-2010, investment growth reached 8 percent (y/y) in response to
strengthening domestic and external demand. The more favorable investment climate also
received a boost from the upgrading of Indonesia's sovereign credit rating following
improvements in economic fundamentals. Earlier this year, Fitch, S & P and Moody’s
upgraded Indonesia sovereign ratings which have been expected to reach the investment
grade in the near future, whenever the investment growth could reach a higher level.
6. While various macroeconomic indicators are kept in check, increasingly rapid flow of
overseas capital into emerging countries has indeed exposed the Indonesian economy to
greater risks and added complexity to the authorities in managing their macroeconomic
policies. This concern once again became evident in May 2010, when the global economy
faced mounting pressures from financial distress in Europe. This event had made a clear
showcase of how the global economic uncertainty posts grave risks to a small open economy
like Indonesia.
7. In the first four months of 2010, alongside a sizeable capital account surplus, foreign
investors poured money into Indonesia’s financial market, causing a significant surging of
the Indonesian Rupiah of more than 4 percent and allowing BI to accumulate the country’s
foreign exchange reserves to reach a comfortable level of nearly USD79 billion. Growing
investors’ risk aversion due to accelerating adverse development of Greece sovereign debt
crisis triggered a huge reversal of capital flows from Indonesia. The sell-off in Indonesian
financial instruments amounted to USD5.7 billion over the course of a month, particularly
central bank certificates (SBI), put severe pressures on the Rupiah. It was weakened nearly
2 percent and in fact, could have been much larger if the central bank had not intervened
actively. As a consequence, the country’s foreign exchange reserves dropped swiftly by
USD4 billion.
8. In support of such a vigilant intervention in the foreign exchange market, Bank Indonesia
also launched policy packages designed to curb exchange rate volatility. Without being
intended as a capital control, in mid June 2010, BI introduced the regulations around SBI and
money market to generally improve the monetary policy transmission mechanism. BI
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specifically reduced the attractiveness of SBI for carry trade transactions, managed volatility
in portfolio flows and encouraged longer-term investments, and raised the liquidity of the
local interbank market. These measures included requiring a minimum 1˗month holding of
SBIs, introducing 9- and 12-month SBIs, doubling the interest margin to 100 bps from the
policy rate on overnight borrowings and deposits with the central bank, and creating a term-
deposit facility. As a result, since the end of June 2010, the volatility has been subdued, the
level of exchange rate has been stable and under control, and the foreign exchange reserves
stood steadily around USD77 billion, as the capital inflows have started to flow back to the
Indonesian financial assets in more orderly fashion. Market players rated the June 2010’s
policy packages as positive, as it does not essentially restrain the timely and wide-ranging
financial flow in and out of the country. They are in agreement with the authorities’ view that
these measures are contributing to a more robust monetary management and the authorities’
need for financial market deepening.
9. The Indonesia banking sector showed remarkable resilience to the crisis, thanks to earlier
restructuring, prudent regulation and enhanced supervisory framework. Robust capitalization,
low NPL, minimal derivative and foreign exchange exposure, and ample liquidity suggest the
health of the overall banking sector remains protected and solid to weather the financial
pressures. After experiencing growth slowdown in 2009 and Q1-2010, bank credit to private
sector started to pick up, as economic activities gain traction and more confidence in growing
certainty and optimism. In June 2010, the industry’s average CAR reached a high level of
17.4 percent and NPL hovered only around 3.3 percent. Their profit would remain relatively
high, as their loan growth in the last two months is back to pre-crisis level of 18 percent, and
over 50 percent of banks financial products are in the form of Micro, Small and Medium
Enterprises (MSME) loan, which is particularly insensitive to interest rates.
Policy Discussions
Monetary policy
10. As monetary policy in Indonesia remains to face challenges from distorted transmission
mechanism of sticky downward bank interest rates and prevailing supply side constraints, the
Inflation Targeting Framework (ITF) has served the country relatively well to anchor
inflation expectation and to prevent excessive CPI pressures. The central bank’s judicious
monetary measures by managing liquidity and controlling money supply have also been
effective in containing the demand-pull inflationary pressures. Against this background, the
authorities noted that key challenges going forward are to implement appropriate policy mix
and improve further the effectiveness of communication in the ITF. They acknowledged that
efforts to help achieve the inflation target rely on improved cross-institutional coordination
and the industrial structure reinforcement. Commitment to improve coordination, and
intensify communication strategy and efforts was reinvigorated by establishing the Inflation
Monitoring and Control Team, both in the central and regional governments. Meanwhile, the
issues of high cost of banking fund, excess liquidity in financial market, lack of adequate
infrastructure, inefficiency of distribution channel, and imperfect market structure have
always been priority in the authorities’ agenda. They have put a greater emphasis to
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strengthen economic institution and accelerate infrastructure development related with the
efforts to expand production capacity and economic capacity in general.
11. Building Indonesia’s economic momentum into sustained, higher growth in the last decade is
remarkably challenging for the authorities. The uncertainty of global development followed
by massive foreign capital inflow in the recent episodes owing to Indonesia’s open capital
account has left its financial markets vulnerable to the risk of sudden reversal or capital
flight. Even though foreign exchange reserves have increased around USD 18 billion since
September 2008, a huge sell-off in foreign holdings of financial assets could reduce reserves
quickly if BI has to defend Rupiah from a potential steep fall. This heightened vulnerability
to capital flows therefore makes it important for the country to have a deep enough reserves
cushion to be able to stem excessive currency volatility that can destabilize other segments of
the economy. While believing such policy is needed to preserve macroeconomic and
financial stability, the authorities are aware of the consequence to the central bank’s balance
sheet. They acknowledged the growing cost incurred by BI, as it has to pay relatively high
interest rates on the domestic money, compared to its reserves assets earning in the current
low interest rate environment. In view of this development, since a few months ago, the
government and the central bank have initiated discussions aimed to make the non-
marketable government securities held by BI become sellable to the market as it could
improve monetary management and help to strengthen the health of BI’s balance sheet.
Fiscal Policy
12. Last year, the government with the approval of parliament implemented a substantial fiscal
stimulus, involving tax relief and measures to safeguard public purchasing power. Fiscal
policy was focused on delivering a stimulus to the economy during the period of the global
economic downturn, while simultaneously maintaining the fiscal sustainability. Given
Indonesia’s characteristic of budget execution, this stimulus was specially designed with
heavy allocation to tax savings and tax subsidies for business accounted for 77 percent of the
stimulus package, and the remaining was delivered through infrastructure spending. This
uniquely designed stimulus was effectively delivered to support the impact of other stimulus
on the economy. While relatively modest yet appropriate to support Indonesia’s resilience,
the size of this package around 1.3 percent of GDP slightly increased the budget deficit
in 2009 by 1.6 percent of GDP higher than the original target at 1 percent of GDP.
13. While lowering the magnitude of 2010 fiscal stimulus to 0.8 percent of GDP, the authorities
have decided to keep the countercyclical policy. Judging from Indonesia’s recent condition,
the entire package of stimulus is in the form of tax incentives rather than directly stimulating
demand, which tended to drive the economy to heat up easily and thus vulnerable to
inflationary pressure. Earlier this year, they have decreased corporate income tax by
5 percent for companies listed on the Indonesian stock exchange and 3 percent for non–listed
companies, and abolished luxury tax for some high-tech industries. With such policy option,
they recognize that tax policy reforms kept on a mainstay of fiscal consolidation to maintain
adequate flow of revenues. The shortfall of tax revenues is expected to be offset by the better
collection efforts owing to improved administration and taxpayer compliance. In this regard,
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the authorities are very much concerned on the need of raising tax revenue ratios by
broadening the tax base and improving the tax administration effectiveness.
14. In the context of budget spending, the authorities acknowledge the importance of energy
price reforms to support fiscal sustainability over the medium term, and share the same view
as staff’s on the downside risks of delaying the reforms. They closely and continuously
monitor the development in this area. They observed that this year’s purchasing power of
corporate and households, particularly the neediest, remain vulnerable to the price shocks and
needed to be strengthened prior to significant upsurge of fuel price. The authorities therefore
favor a gradual approach to take this difficult decision. In July 2010, they have begun to
lower electricity subsidy by increasing tariffs around 10 to 15 percent on average (18 percent
maximum) with the exclusion of small customers to allow further flexibility for budgetary
maneuver. In the mean time, administered fuel price will be adjusted whenever world oil
price rises deviating more than10 percent from the assumption. They remain committed to
undertake the fuel price reforms as the economy and social condition allow.
15. In light of these policies, the government has reduced its projected budget deficit to
1.5 percent of GDP. To finance this lower budget deficit, the government has cut its plan on
spending the 2009 financing surplus and decreased the bond issuance. With strong fiscal
position, low Debt to GDP ratio recorded 26 percent and robust growth outlook, by early
August 2010 it was already well advanced on filing its market sourced financing plan, having
sold IDR132 trillions of conventional and sharia bonds, in addition to USD2 billion global
bonds with considerable lower yield compared to the previous year’s issuance. The
Government has projected the 2011 budget deficit to be 1.7 percent of GDP, slightly higher
than that of 2010. This slight increase was attributable to higher increase in government
spending vis a vis increase in revenue.
Banking Policy
16. Indonesia’s financial system is far stronger than a decade ago in the aftermath of 1997/1998
Asian crisis. Since then, the authorities undertook, ad infinitum, a major overhaul in the
financial system, a series of far-reaching policy reforms, and a range of bold and painstaking
measures to strengthen financial system stability. The recent episodes of the global financial
crisis have well tested the resilience of the Indonesian financial system. The FSAP stress test
results also suggested that the Indonesian banking sector representing 80 percent of the
overall financial sector assets is resilient to various shock scenarios and in robust condition to
support higher economic growth.
17. Following the significant retrenchment of credit growth due to the crisis, BI’s policies have
been focused on improving banking industry resilience through further actions to strengthen
the banking intermediation function. It has recently contemplated to adjust the existing macro
prudential measure with the aim of reducing excessive pro-cyclicality of bank lending
behavior. The measure is essentially designed for encouraging bank lending in the recession
and discouraging it in a boom period by linking the reserve requirement to banks’ Loan to
Deposit Ratio. This measure has been implemented since a few years ago and works
effectively to balance the need for stimulating bank intermediation and better liquidity
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management. In the past, the policy however did not have an automatic brake when banks’
credit growth has been relatively high. The new LDR-linked reserve requirement is revised in
order to incorporate this critical feature.
18. In the regulatory and supervisory framework, the authorities have also made tremendous
progress, but more remains to be done to further solidify financial sector resilience. As an integral
part of global community, particularly through its active roles in G-20, Financial Stability Board
(FSB), and the Basel Committee on Banking Supervision (BCBS), Indonesia is committed to rebuild
a healthier global financial system and move together in a transparent and coordinated way on
national implementation of internationally agreed rules, followed by robust supervision frameworks.
By having the joint IMF-WB FSAP for the very first time in Indonesia, the authorities expect that
they will receive a balanced and valuable feedback for continued improvements of structure
and various domestic financial system policies. Indonesia has also prepared action plans to
respond to the FSAP findings, as part of its commitments to strengthen their compliance to
international standards. Priorities are being made to bolster compliance to standards in the
banking sector and Basel Core Principles for Effective Banking Supervision (BCP).
19. As suggested by staff, Indonesia needs to have a sound legal framework for financial stability
and development of financial sector. Last month, as a preliminary step to enhance the
effectiveness of crisis management, Minister of Finance, BI Governor and Chairman of
Deposit Insurance Company have signed MOU aimed at elucidating the roles and
responsibilities of each financial safety nets participant on the eve of crisis. They are
committed to adopt the revised Financial System Net Law as the draft Law that has already
been submitted for Parliamentary approval. Meanwhile, with a view to improving financial
regulation and supervision, the authorities just re-embarked a deferred initiative to integrate
banks and all others financial institutions including capital market supervision into a new
unified supervisory body. They are now in the process of identifying, outlining and defining
the macro-micro supervisory responsibilities between the central bank and a newly proposed
agency. The authorities recognize that the central bank needs to continue its own analysis of
macro-prudential regulation tailored to the Indonesian banking system and economy.
Preventing systemic risks in the near future needs a comprehensive role of the central bank in
macro-prudential surveillance.
Final Remarks
20. Despite subject to prevailing problems and susceptible to external and internal shocks, the
Indonesian authorities have successfully overcome the difficult year of 2009 with a number
of achievements. The authorities’ perseverant efforts to maintain macroeconomic and
financial stability, while continuing structural reforms, succeeded in navigating the economy
through various shocks. Looking forward, as the global economic recovery chart further
progresses, domestic demand grows persistently strong and capital inflows remain on the
rising trend, key challenges are effective implementation to the most appropriate policy mix
in a wide-ranging global uncertainty, while advancing sustained high growth. The Indonesian
authorities welcome and look forward to a strengthened relationship with the Fund that could
facilitate Indonesia success in overriding the challenges and achieving its prosperous future.